This post is part of a series sponsored by AgentSync.
After years of watching insurance carriers exit the California property and casualty market, the state may see another exodus in the wake of the January 2025 wildfires and the historic $1 billion assessment the state’s levying on insurers to shore up the California FAIR plan.
For California regulators, residents, and businesses, this state of affairs is untenable. But who will be willing to make what changes will determine the fate of the P&C market in California, while mapping the road ahead or providing a cautionary tale for other markets struggling with sustainability.
Following, we’ll take a peek under the hood to examine:
- The California 2025 wildfires and their impact on the state insurance market
- Historical friction between regulators and carriers in the California P&C industry
- Potential legislative and regulatory approaches to fix the issue
- How P&C insurance carriers can adapt
2025 California Palisades wildfires
Jan. 7, 2025, residents of Pacific Palisades, California, called the fire department to report smoke in the area coming from an area near hiking trails where the department had put out a fire days earlier. Firefighters, already taxed by other calls, took longer than usual to respond. When the fire department arrived on scene, local drought conditions and unusually high winds had accelerated the blaze.
Flames from this and another regional fire, the Eaton fire, weren’t “contained” by fire efforts until Jan. 31, 2025, after the fires consumed a combined nearly 50,000 acres, 29 human lives, and around 17,000 properties. More than 200,000 people were touched by evacuation orders, and no officials have yet estimated how many people will be left completely homeless in the wake of these events. A Verisk catastrophe model pinned possible insured losses to the fire alone (not including other damages such as smoke) between $30 billion to $35 billion. But, as anyone who’s been paying attention to California may have noticed, not every home and business carries insurance. One estimate pegs the uninsured total losses in the area near 10 percent.
California law requires insurers to maintain enough cashflow to pay out 100 percent of claims at any given time, so there’s little doubt that the policyholders whose homes and businesses burned will get recompense. However, among the insureds in the Palisades, more than 20 percent are covered by the state’s FAIR Plan, and about 12 percent of Eaton insureds are enrolled in the California FAIR Plan. The FAIR Plan, California’s state-managed insurer of last resort, limits coverage to a $3 million cap, which isn’t as much as it sounds in the Los Angeles area of the Golden State, where the median home listing price was $4.9 million in December 2024.
The California FAIR Plan is funded by premium payments, catastrophe bonds, and reinsurance contracts, but it’s also funded through state fees and assessments to the insurance carriers that do business in the state’s admitted market. In the wake of this massive loss event, state leaders acknowledged they didn’t have enough reinsurance and can’t issue catastrophe bonds fast enough to pay out claims, so will assess $1 billion amongst member insurers.
“The Commissioner finds that the FAIR Plan is faced with a substantial threat of insolvency due to unprecedented losses from the January 2025 Southern California wildfires and wind events, and has demonstrated that an assessment is necessary in order to ensure that the FAIR Plan may continue operating and promptly pay claims without interruption so that policyholders impacted by these devastating events can begin to rebuild their lives,” said Order No. 2025-1.
Estimates for the 2025 P&C market broadly anticipated that carriers were finally in a place where risk and pricing were in a good place to find that parity of profitability and coverage. But, with the California wildfires, that may change for insurers that do business in the state. And, even for carriers such as State Farm and Allstate, both of which have announced they’re pulling out of California, it’s not quite as simple as “declaring” bankruptcy (iykyk). State law forbids discontinuing insurance policies in an area until a full year after a catastrophic event, and the list of regions affected by this termination moratorium in California is 100 ZIP codes long.
California regulatory tension between insurers and consumer protection
The FAIR Plan was intended to be a plan of last resort, but from 2020 to 2024, plan liabilities doubled as insurance carriers pulled out of the state’s market. Why’d carriers leave the state to begin with?
It comes down to profitability. P&C insurance is no nonprofit enterprise – insurance owners and shareholders expect to profit from good underwriting and that lovely ratio between premiums and claims. And if a carrier can’t stay profitable, they’ll pull out of the state. Drilling down, what’s keeping carriers from being profitable in California?
- Climate change isn’t not a factor. Many P&C models are based on historical data that prices in just a few large loss events from century to century. Yet, our climate is changing, and some areas are experiencing “once-in-a-century” loss events every few years. Growing almonds in drought-stricken areas, or diverting clean water to power data centers and AI are great examples of the ways human resource use impacts our surrounding environments.
- Meanwhile, basic infrastructure choices drive risk. New technology allows us to build in ever more remote or interesting locations, but lacks regulatory requirements for the home hardening or loss-prevention tech that can help avoid a total loss in the event of a natural disaster.
- California’s rate-setting powers have artificially maintained premiums far below what carriers say are the state’s actual risks. The knock-on effects are that carriers often end up setting rates higher in states where regulators don’t have rate-setting powers, so those states end up subsidizing rate-setting states, as exemplified in this column about the same effect in long-term care. For example, Bankrate prices the average annual premium for homes in every state. A $300,000 home in California costs $1,429 in annual premiums in 2025. The same $300,000 home with the same coverage in Kansas (where regulators don’t set rates) would cost $4,287.
- Inflation has made everything more expensive, and California was one of the costliest states in the nation to begin with.
- Proposition 103 is a 1988 law in California that, among other things, required carriers to base their pricing models off of the last 20 years of events. This law historically made it harder for carriers to raise rates when future-facing catastrophe models or even five years of a hard market came into play.
- Reinsurance costs, which allow carriers to pass on some of their risk and distribute it amongst global reinsurers, have skyrocketed in the last decade, sometimes doubling year over year.
To address these issues and attract more insurers back to the state, California Insurance Commissioner Ricardo Lara announced in 2024 that he was seeking changes to Proposition 103 that’d enable carriers to use catastrophe models to more accurately price products. He also said he’d step up enforcement of his 2024 regulation that requires carriers in the admitted market to take on more policies in distressed areas.
Lara’s regulation, which was finalized and issued Dec. 30, 2024, as part of his Sustainable Insurance Strategy, allows major insurers to adopt California-specific catastrophe models and factor in the cost of reinsurance coverage when they issue rate increases, so long as those increases are spread across all policies in the state (and aren’t specific to an individual region or ZIP code). It also requires the major insurance carriers in the state to step up issuing new policies in high-wildfire-risk regions of the state. Every year, an insurer must increase the wildfire-risk policies in its statewide portfolio by 5 percent, ultimately aiming for major insurance carriers to hold 85 percent of their policies in high-risk areas.
Consumer critics of Lara’s plan say the 5 percent policy increase allowance is ultimately a loophole that allows carriers to get off the hook for writing a full 85 percent of policies in high-risk areas, and that they’ll slow play those initiatives. Yet, an insurance regulator who has seen 7 out of the 12 major P&C carriers in the state dial back policies or leave altogether citing profitability may not have many bargaining chips. Meanwhile, we haven’t seen a flock of carriers returning to the state, and, with wildfire risk looming large in everyone’s minds, the future is uncertain.
What’s going to happen?
If we pop over to our scrying glass for a minute, it seems likely the California State Assembly will get involved. A random sampling of bills the California Department of Insurance is supporting includes plans to issue catastrophic bonds and shore up the FAIR Plan, forcing insurance carriers to pay full coverage even when the insured doesn’t have an itemized list for claims, tax-free funds and grants to harden homes, broadening the one-year moratorium on home insurance cancellations to include commercial property, and a California-specific wildfire catastrophe model.
Insurance carriers in the state have already applied for premium increases that’d raise rates by 20 percent, or 50 percent. They’ve been denied.
Tragically, this is a flywheel. Certainly, carriers are capable of overcharging. But when they can’t charge enough in premiums to cover their internal expenses, carriers will leave. When carriers leave, the state FAIR Plan must take on more policies, and the insurance carriers remaining in the state have less competition for pricing, customer service, or other points. When disaster strikes, the private insurance companies have to subsidize the FAIR Plan, passing on costs to private insurance policyholders, who may find themselves priced out of private insurance and instead seeking FAIR Plan coverage. As the FAIR Plan takes on more and more risk, it, too, must raise prices, and more people are likely to drop coverage altogether, risking homelessness and destitution with each wildfire season.
Yet, Ricardo Lara is up for re-election in 2026, and isn’t likely to have an advantage at the polls if rates skyrocket. Nor will he look good on the ballot if no one can find a recognizable insurer to provide insurance coverage for their homes and businesses. So it’s imperative that he, consumer groups, and insurers get in a room and figure things out before further disasters worsen the situation.
One possible path forward is that a 2022 regulation from Lara’s office directed insurers to consider property-specific risks when rating wildfires, allowing insurers to give discounts to customers who go hard for risk mitigation by establishing fire breaks and preventing ember accumulation. Transparency in fire ratings could galvanize homeowners and communities to act to reduce both insurance premiums and their actual risk, which is a win across the board. Even non-California insurers may keep an eye on these kinds of approaches: Other states are looking to California for innovation on wildfire insurance.
Finding success for insurance carriers in the California P&C market
California is hardly the only state struggling. In 2024 we saw more stability in P&C, but that’s a shifting target as new risks emerge and once-in-a-century storms wreck expensive property. For P&C carriers that hope to deliver on their bottom line, McKinsey reports four common factors that can make the difference in the coming year:
- Clear strategies to capture profitable growth and focused execution
- Modernized underwriting
- Cost-effectively acquiring businesses that solve for distribution
- Operational efficiencies that lower internal administrative costs
While some carriers are trying to get out of California, others are trying to limit risk by using MGA agreements to distribute products in the state. But even carriers that aren’t grappling with the California market are facing the kinds of market conditions that demand flexibility and the ability to scale and right-size their distribution channels.
Within that paradigm, it’s imperative to manage your distribution from a central location with the kind of reporting capability and data integrity that allows you to identify new channels while de-emphasizing channels that don’t suit your current needs. None of the factors McKinsey identified can be achieved with manual processes or outdated technology. Only high-performance execution of a modern distribution channel management solution will provide meaningful resilience in these market conditions.
How AgentSync Manage makes your distribution flexible
Clear strategies to capture profitable growth and focused execution
Accurate data is everything for a business. Without a clear picture of business line and geographical performance, you can’t have a clear strategy for scale nor the ability to redirect resources toward the most profitable endeavors.
Manage has robust out-of-the-box reporting for clear data, and allows you to analyze your current distribution through regional Scorecards. Easily sort producer records to see where your appointments align with licensed producers, and see where your zones of opportunity exist, all without the hassle of skipping around spreadsheets and systems. And Manage’s adjuster data allows you to onboard and offboard adjusters at scale so a regional emergency isn’t a business emergency.
Cost-effectively acquiring businesses that solve for distribution
Mergers and acquisitions can be a solid path to growth, but not if they just add to your operational headaches. The cost-effectiveness of an acquisition is largely dependent on your existing operational processes such as onboarding and contracting.
With AgentSync Manage, you can use easy-onboarding portals that give producers transparency and control so they can see where their applications are in the process without a deluge of “have you got it yet” phonecalls. Better onboarding means your staff can skip data entry and re-entry and focus on right-sizing your new distribution force and evaluating your partners for efficiency.
Operational efficiencies that lower internal costs
AgentSync Manage is purpose-built for insurance businesses so you can see exactly where your overlaps and redundancies are. Right-size your distribution at the click of a button by deciding where and when to onboard or terminate producers. Don’t wait for your renewal bill before deciding how to handle your sales territory – use Manage to take action on producer appointments in bulk.
If you’re still wondering where you can level up your distribution channel management for a more streamlined business that’s poised for growth and profitability in any market circumstance, take our Distribution Channel Management Assessment. And if you’re ready to see what AgentSync can do for you, schedule a demo today.
Topics
Trends
California
Property Casualty
