On Tuesday, after a ferocious Santa Ana windstorm blew through Southern California, a severe brush fire broke out in the wealthy Pacific Palisades neighborhood of Los Angeles, burning 1,000 structures and forcing tens of thousands of residents to evacuate as of Wednesday afternoon. Another large brush fire broke out near Pasadena around the same time, killing at least two people. Together the two blazes threatened some of the most valuable homes and businesses in the United States. The damage from the Palisades Fire alone could exceed $10 billion, according to a preliminary estimate from J.P. Morgan.
If this estimate holds true, it will test insurers' commitment to a market that has been teetering on the verge of collapse for the better part of a decade now. Over the past five years, California has become a poster child for what climate-fueled weather disasters can do to a state's home insurance market. Following a rash of historic wildfires in 2017 and 2018, insurance companies have fled the state, dropped tens of thousands of customers in flammable areas, and raised prices by double-digit percentages.
Until recently, elected officials have taken few major steps to address the crisis. But late last month, after more than a year of drafting, California's insurance commissioner unveiled a set of reforms that he claimed will bring companies back into the fold as they take effect this year.
"This is a historic moment for California," said Ricardo Lara, the state's insurance commissioner, when he revealed the rules in December. "With input from thousands of residents throughout California, this reform balances protecting consumers with the need to strengthen our market against climate risks."
The rules come after months of debate among state insurance officials, lawmakers, insurance companies, and consumer advocates. The biggest change is that California will now require many insurance companies to do more business in what the state calls "distressed areas," the fire-prone scrubland and mountain regions where insurers are now hiking prices and dropping customers. Companies will soon have to ensure that their market share in these areas is at least 85 percent of their total statewide market share -- in other words, if a company controls 10 percent of the state's insurance market, it must control at least 8.5 percent of the market in fire-prone areas.
This mandate should push big companies like State Farm and Allstate to pick up customers they've dropped in flammable regions like the mountainous north of the state. Some companies have already begun to offer new policies in burned areas in anticipation of the state's new rules: the insurance company Mercury announced last week that it will be the first insurance company in the state to offer new policies in Paradise, California, which was destroyed in the catastrophic 2018 Camp Fire. The move recognizes the town's work to mitigate future fires by clearing trees and hardening homes.