Raging fires in Southern California have caused widespread devastation in a region that has long been aware of its vulnerability to natural disasters.
With neighborhoods like Pacific Palisades and other high-risk areas burning, more than 180,000 people have been displaced, ten people have lost their lives, and more than 57 facilities have been severely damaged, according to Bloomberg.
The Economist newspaper said that these fires are not just a human tragedy, but rather a deep economic crisis that exposes the fragility of the insurance market in California, and raises concerns about the escalating costs of climate-related disasters.
The most expensive in American history
As of January 10, the initial direct economic damage from these fires was estimated at more than $50 billion, with only about $20 billion expected to be covered by insurance, according to JPMorgan estimates.
These numbers make these fires one of the costliest in US history, and the Pacific Palisades neighborhood, where the median home price is $4 million, suffered the most damage.
As for the Eaton Fire in the north, it continues to threaten less affluent areas, highlighting the diverse and random nature of this disaster.
A report issued by the American weather forecasting services company AccuWeather indicated that the total losses could range between $135 and $150 billion, which reflects the significant impact on a region containing some of the most expensive real estate in the United States.
These fires are the worst forest fires in the history of Los Angeles, and US President Joe Biden said that they are “the largest and most destructive forest fires in the history of California,” stressing that “climate change is a reality.”
Biden, who declared a major disaster in California, held meetings with senior officials to discuss the federal response.
The insurance market is in hell
The fires revealed major shortcomings in California’s insurance market, which is struggling to adapt to the continuing increase in the severity and frequency of fires due to climate change, according to The Economist.
Seven of the 12 largest insurance companies have reduced their presence in the state in recent years. For example, Allstate stopped selling new policies entirely in 2022, while State Farm canceled 30,000 policies in 2023, including 1,600 policies in the Pacific Palisades neighborhood.
Exposure to FAIR, California’s state insurance plan of last resort, has risen 85% in high-risk areas such as Pacific Palisades, where potential claims now exceed $3 billion.
However, the plan’s financial capabilities are still insufficient, as it only has $200 million in reserves and $2.5 billion in reinsurance, creating a risk that the entire system will fail.
This shortage, according to Bloomberg, leaves many homeowners with little or no insurance, especially those whose properties exceed FAIR’s maximum coverage of $3 million.
Climate change and policy challenges
Bloomberg reported that insurance sector experts have long warned that California’s outdated regulatory framework has hampered the insurance market’s ability to operate effectively.
A ballot initiative in 1988 banned insurance companies from using risk models based on climate change, forcing them to rely on historical data that no longer reflects current reality.
These restrictions, according to Bloomberg, have discouraged private insurance companies from bearing fire risks.
Although reforms passed on January 2 now allow for model-based pricing, these changes come too late to address the effects of the current fires.
Wider implications
These fires represent a turning point in the relationship between climate risks, property values, and economic stability. According to Michael Warra, a fire expert at Stanford University who spoke to The Economist, neighborhoods like Pacific Palisades exemplify the fragile balance between high property values and catastrophic risks.
The widespread withdrawal of private insurers could lead to a housing market collapse, Wara said, as properties that cannot be insured become unmortgageable, leading to an economic downturn similar to the 2008 financial crisis.
Moreover, the health impacts of fires, often overlooked in economic analyses, are significant. Smoke inhalation and air pollution are estimated to cost billions of dollars annually in hidden health expenses, increasing the burden on residents and state resources.
International and technological cooperation
Firefighting efforts witnessed international cooperation, as Canada sent its famous Kinder planes to assist firefighters in Los Angeles.
This act of “climate diplomacy” underscores the importance of cross-border cooperation in addressing climate emergencies.
At the same time, technology has provided some solace to residents, with the Watch Duty app, which tracks fire developments, gaining 1.4 million downloads in just 48 hours.
The Economist stresses that the Los Angeles fires must be an important reminder of the urgent need to take comprehensive action on climate change and build a resilient insurance system, noting the need for policymakers to address systemic vulnerabilities to prevent further devastation.
As Senator Sheldon Whitehouse noted in a statement to Bloomberg, the cascading failure resulting from such disasters could lead to a broader economic collapse unless decisive measures are taken.
