The Southern California wildfires have been making headlines since January 7, 2025, as thousands of homes have been destroyed. Property damage and economic losses could reach up to AU$240b, making these fires the most costly in U.S. history. The sheer extent of the wildfires will inevitably impact global reinsurance markets, potentially leading to increased premiums here in Australia which also faces its own challenges with extreme weather events.
Conspiracy theories circulating on social media around the legitimacy of the fires have exacerbated tensions in the US including claims that the fires were intentionally started to clear land for the SmartLA 2028 initiative and that insurers anticipated the fires and cancelled policies in advance. Between 2020 and 2022, 2.8m homeowner policies were not renewed in California1. In 2024, State Farm, the largest US insurer, dropped 30,000 policies2, including 1,626 policies for premises based in the Pacific Palisades3. Other prominent insurers like Allstate and Farmers followed suit, reducing property coverage in high-risk areas.
Whilst data shows that insurers elected not to renew thousands of policies in the run-up to the wildfires, this was owing to actuarial evidence on climate conditions. Insurers use historical data and evidence to assess risks and make underwriting decisions about whom to insure, where to offer coverage, and how much to charge.
Recent changes to insurance cost and availability reflect the reality that extreme weather events, which may once have been treated as anomalies, have grown in scale and frequency. In response, insurers must adjust their models to treat such events as the rule rather the exception. This approach, known as risk-based underwriting, helps insurers remain financially stable and ensures they’re able to pay claims. In the case of wildfires, insurers focus on the areas which the data shows are most vulnerable to fires and assess the risks of building or claims arising in those regions.
California has responded to the lack of insurance availability and insurer appetite with measures like FAIR Plan which ensures high-risk homeowners are able to access basic insurance. Another measure introduced in California is the Mandatory One-Year Moratorium on Insurance Non-Renewals after a declared state of emergency. Strategies like this, whilst protecting homeowners who may be otherwise uninsurable, are not sound long-term solutions to address and reduce the underlying risk.
Australia’s proactive approach offers other countries valuable lessons in reducing vulnerability. To specifically address the wildfire risk in Australia, advanced wildfire mitigation strategies including extensive controlled burns, better land management, water reserving strategies for firefighters and stricter building codes have been implemented across Australian states. Specific examples can be seen in Western Australia and Victoria who use prescribed burning to reduce fuel loads and minimise bushfire intensity. Another example of Australia’s pre-emptive approach to risk is the significant volunteer rural fire service which provides local human resources needed when a fire breaks out.
In contrast, Californian officials continue to face challenges with environmental regulations, urban expansion, mismanagement of firefighting funds and water shortages, leading to state officials prioritising emergency response over prevention. California has not been able to implement a similar volunteer-based firefighting service.
With growing insurance challenges due to extreme weather in Australia, the Government may consider adopting similar insurance strategies to California. Creating a FAIR Plan equivalent focused on providing basic coverage in high-risk areas could have assisted in supporting homeowners impacted by the events of the 2019–2020 Black Summer fires and the $7.7b in flood related claims during 20224. Additionally, regulations could be implemented to mandate insurers offer coverage in disaster prone regions, alongside sharing reinsurance costs with policyholders. We would caveat however, that any such regulations or initiatives could only be sustainable if appropriate balance between affordability for homeowners and the financial stability of insurers is achieved.
The Cyclone Reinsurance Pool is a great example of an Australian initiative which seeks to address the difficulty faced by policyholders in obtaining affordable insurance in the commercial market and could easily be adapted for flood and fire prone regions.
There is no ‘one size fits all approach’ to Australia’s insurance challenges. Insurers cannot be relied upon to provide the entire solution and to expect them to do so would drive up rates for all insurance buyers (as per the ‘premiums of many pay for the loss of a few’ principle).
Australia needs to continue to develop policies at local, state and federal levels to consider exposures and protect current and future homeowners from escalating climate risks. Strategies like moratoriums, insurance pools, and improved mitigation can provide temporary relief, but insurability remains a long-term concern.
Property owners should seek the advice of expert property risk advisors who can offer tailored solutions to navigate high premiums and limited coverage. Talk to your Bellrock Advisor today to secure your property’s insurability.
1 California’s Insurance Market Collapse: Wildfires Drive Mass Policy Cancellations & Soaring Costs
2 State Farm General Insurance Company: Update on California
3 First, they lost their home insurance. Then, L.A. fires consumed their homes
4 Flood insurance inquiry reports on industry failures
