Observers warn that the damage from California's devastating wildfires could hit the insurance market, which is already reeling from successive crises.

"It's a really bad disaster. A wildfire in January? It just confirms the view of many insurers that climate change is an increasing risk," said Amy Bach, chief executive of United Policyholders, a consumer advocacy group.

The massive wildfire that swept through the affluent Pacific Palisades could make it "one of the five most expensive wildfires in U.S. history," according to brokerage Aon.

California is the largest home insurance market in the U.S., but it is also one of the most challenging regions for insurers. Aon said that as of last year, eight of the 10 costliest wildfires in the U.S. occurred in the state.

Many of California’s top insurers have pulled out of the state, leaving many people affected by the wildfires with only state-sponsored coverage or no coverage at all.

State Farm, the state’s largest home insurer, announced in March that it would not renew 72,000 property policies, while Chubb and its subsidiaries stopped writing new policies on high-value homes because of the high risk of wildfires.

It’s unclear how many homeowners in Pacific Palisades and elsewhere may be covered by insurance after the disaster, but some say insurers didn’t renew their policies before the fires. Actor James Woods, who lost his home in the Palisades fire, posted on X on Jan. 7 that “one of the major insurance companies canceled all policies in our neighborhood four months ago.”

State Farm announced last year that it would not renew 1,626 policies in Pacific Palisades when they expire in July 2024. A company spokesperson declined to comment on the decision, but said that “our number one priority is the safety of our customers, agents and employees impacted by the wildfires, as well as supporting our customers during this time of disaster.”

California is facing more frequent and larger wildfires due to ongoing climate change, according to the state Environmental Protection Agency. That trend is leading to increased insured property losses and could lead insurers to raise premiums.

“These events will continue to have a profound and negative impact on the state’s insurance market. Increased claims could increase premiums and reduce insurers’ ability to pay,” said Denise Rappmund, a senior analyst at Moody’s Ratings.

If insurers continue to pull out of California, it will put pressure on the government-funded FAIR Plan, which is considered a last resort for many California homeowners, although FAIR Plan policies typically have limited coverage.

FAIR Plan policies cover up to $3 million in damage to property caused by certain causes, including fire. However, they do not include personal liability or other types of protection that private insurers typically provide.

FAIR Plan saw its policy count increase from just over 200,000 in September 2020 to just over 450,000 in September 2024. Its risk coverage nearly tripled to $458 billion over the same period.

Pacific Palisades is one of the largest concentrations of FAIR Plan policyholders in California, with the company estimating its coverage in the area at $5.89 billion.

JP Morgan analysts estimate the total cost of wildfires in Los Angeles County could be close to $50 billion, while insurers could pay out as much as $20 billion. Other estimates put the losses even higher.

It’s unclear how much FAIR Plan will have to pay out in wildfire-related claims or how this disaster will impact its solvency. However, observers say FAIR Plan could call on other insurers to help if needed.

A FAIR Plan spokesperson said it was “too early to give a loss estimate because claims are just starting to be filed and processed.” The spokesperson said the company has payment mechanisms in place to ensure all customer claims are properly processed.

“I think it will be about 45 days before we can really know what the actual loss is,” said Max Gilman, head of California insurance commissions at brokerage HUB International.

New fires in Los Angeles this week could further undermine efforts to attract insurers to the state. “Insurers will be weighing their benefits against the potential risk of wildfires,” said Sridhar Manyem, senior director at AM Best.

Rising losses from fires, floods, wildfires and storms have pushed global natural catastrophe insurance claims to more than $140 billion last year, far exceeding the $94 billion average from 2013 to 2023.

Insurers aren’t the only ones having second thoughts about buying a home in California.

Brett Dedeaux, whose home in a neighborhood adjacent to the Will Rogers Historic Park was affected by the wildfires, wonders “what’s going to happen to insurance now.” He says few insurers are willing to provide coverage in areas prone to wildfires.

“Does it make sense to own a home here with expensive insurance?” he says.