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Editor’s note, February 12, 11:25 am ET: California state regulators have now allowed its insurer of last resort, the FAIR Plan, to collect $1 billion in additional funds from its member companies so that the program can afford to pay out claims from the 2025 Los Angeles Fires. It’s the first time since 1994 that such a measure was approved, and it will likely raise premiums for everyone in the state.

The story below, written before the announcement, explains how California’s insurance system is struggling to cope with major disasters and the drastic choices it must make in the face of climate change.

Now that the extraordinarily fast-moving wildfires that engulfed swaths of Southern California this year have started to die down, the enduring toll is beginning to emerge.

The blazes killed 29 people and destroyed at least 16,000 structures, including homes, offices, shops, and public infrastructure. Angelenos are starting to get back to survey the damage, but it may be weeks before they can start rebuilding as cleanup crews first work to clear toxic debris. The destruction of some of the state’s most expensive mansions in communities like Pacific Palisades received much of the attention, but the fires also displaced people in predominantly middle- and working-class areas like Altadena and Pasadena, where the Eaton Fire burned through 9,400 buildings.

“It’s not just a rich person’s disaster,” said Adam Rose, a professor at the University of California studying the economic impacts of disruptions like wildfires.

State Farm, California’s largest insurer, said it has already paid out $1 billion across 8,700 claims from the Palisades and the Eaton fires. “We know we will ultimately pay out significantly more, as these fires will collectively be the costliest in the history of the company,” State Farm executives wrote in a letter to Ricardo Lara, California’s insurance commissioner.

Verisk, a risk analysis firm, calculated that insured losses would total between $28 billion and $35 billion. CoreLogic, a property analytics company, put that bill between $35 billion and $45 billion. Economists at the University of California Los Angeles pegged the insured losses at $75 billion.

For comparison, the 2018 Camp Fire that burned down Paradise, California, was the state’s deadliest wildfire and racked up $12.5 billion in insured losses.

But insured properties weren’t the only things lost to the flames. Morgan Stanley estimated that the fires would lead to 20,000 to 40,000 lost jobs in January and will increase local inflation as people try to replace what they’ve lost. The UCLA team found the total property and capital losses range as high as $164 billion. AccuWeather estimated that the total damage plus broader economic slowdown would add up between $250 billion and $275 billion. That would make the 2025 Los Angeles fires the costliest natural disaster in US history, more than the $200 billion total bill from Hurricane Katrina in 2005.

That raises the question: Who is going to pay for all of this?

Safeguards like insurance can help contain the costs, and provide the funds to rebuild. But that isn’t free, and when disasters reach such extraordinary scales, it’s not just the scorched community that pays — we all do. Through higher prices for goods, as well as rising insurance rates and taxes, the burden of the blazes, directly and indirectly, reaches far beyond the edges of their smoke and ash.

Disasters are getting more costly. That’s stressing our financial guardrails.

Across the country, population growth, the economy, and climate change have been on a collision course: More people are moving to areas vulnerable to burning, flooding, or drying out, putting more people (and their property) in harm’s way. Because of inflation and economic growth, the cost of rebuilding is rising. And as the climate changes, extreme events like hurricanes and wildfires are becoming more destructive. So when a disaster does occur, its price tag adds up to a gargantuan number.

Many of the residents who lost their homes and fled the fires are paying out of pocket if they can afford it, or turning to relief aid if they can’t. A GoFundMe spokesperson told Vox that donors have contributed more than $200 million through its fundraising platform to individuals and nonprofits for wildfire relief efforts. The Federal Emergency Management Agency has also approved more than $52 million for emergency housing assistance and other needs.

Normally, a community impacted by a major natural disaster could rely on aid from the federal government, too. But President Donald Trump and Republicans in Congress want to impose policy conditions on federal disaster aid going to the Los Angeles fires, demanding voter ID laws and changes to California’s water management before Washington chips in.

Now as the embers fade, insurance is going to be the main engine of the recovery. In California, though, this engine is sputtering.

The roots of the problem go back to a 1988 California ballot initiative known as Proposition 103 that limits how much insurance companies can raise their rates, the factors that they are allowed to consider, and the perils they must cover. It was meant to protect homeowners from price gouging, but this regulation, along with rising wildfire risks, have led some insurance companies to exit the Golden State entirely. The insurance providers that remain are asking for approval to raise their rates; State Farm, for example, requested immediate approval on February 3 for a 22 percent hike for homeowners and a 15 percent increase for renters. They’re also growing increasingly anxious about the future. As average temperatures rise due to climate change, California is poised to experience more drastic swings between rainy and dry seasons, creating a weather whiplash that sets the stage for more wildfires, more floods, and more mudslides.

Since banks require mortgage holders to have insurance and some private firms aren’t willing to provide it anymore, many homeowners have no option other than California’s insurer of last resort, the FAIR Plan. It’s intended as a temporary safety net providing limited, expensive coverage, yet it’s become a dominant player in the insurance market.

In 2020, the FAIR Plan had $153 billion in exposure, the value of potential payouts across its policyholders — basically the worst-case scenario for how much an insurance company would have to pay if everyone they insure in an area filed a claim. Just four years later, that shot up to $458 billion as more residents who lost private coverage turned to their last remaining option.

Now facing what may be the most expensive disaster in its history, the FAIR Plan is running out of cash, which may force it to take more drastic actions to cover its obligations. That could lead to higher insurance premiums for all policyholders in California, not just those on the FAIR Plan.

To cushion the blow of disasters like the Los Angeles fires, insurance companies can buy their own insurance policies, known as reinsurance. These policies come from big, global companies that distribute their risks around the world and usually aren’t constrained by government regulations. That means reinsurance premiums can get pricey, especially as more major disasters strike around the world, pressuring retail insurers from the other side. US reinsurance rates doubled between 2018 and 2023.

“Right now, the state of California will not allow insurers to put the expense of the reinsurance into their rates,” said Tom Larsen, who leads the catastrophe risk team at CoreLogic. “So that’s an inhibitor for insurers to buy reinsurance and increases the likelihood that an insurer could go bankrupt or insolvent.”

California has made some changes that will allow insurers to begin incorporating these expenses into what they charge customers, something all other states already do. But rising reinsurance premiums will likely lead to higher home insurance rates from all insurers, so the damage from a tempest or inferno far away could make you pay more to protect your own house.

How do we know how much we’ve lost?

Figuring out the losses from a disaster is important for mustering the resources to respond, to plan for the future, and to develop a long-term strategy for reducing risks. But it’s tricky. Companies that tally these damage estimates look at a variety of metrics like before-and-after satellite images, aerial photos, property records, wind speeds during the fire, building inventories, and vehicle registrations. Together, these variables feed into a catastrophe model that can anticipate events that have never been seen before and attach a dollar value to them — letting residents, policymakers, and businesses know just how much could be at stake in the future.

That’s why analysts can already say that the recent wildfires around Los Angeles are among the most expensive in history, even as the ashes are only now cooling. “We are essentially taking all of that data, combining it with the hazard and the vulnerability, and estimating the total loss,” said Jay Guin, the chief research officer at Verisk Extreme Event Solutions. “From our modeling point of view, this was not a surprise to us.”

However, it wasn’t until last year that California allowed insurers to use forward-looking catastrophe models in setting their rates, which account for future shifts like population growth and weather worsened by climate change. Previously, insurers only looked at historical losses to calculate insurance rates, leaving out a major threat to their business model.

There are other factors driving up the costs as well. With so many homes that need repairs and reconstruction at the same time, there aren’t enough workers to go around. Building materials are often in short supply. So it takes longer and costs more to rebuild.

While areas like Pacific Palisades saw a big spike in property values in recent years, insurers only cover what it takes to restore the property — not the market value. “The compensation is strictly the reconstruction,” said Larsen. That can create an incentive to rebuild rather than move: Many residents bought their homes decades ago at much cheaper prices and far lower mortgage rates, and the insurance payouts aren’t enough to move somewhere else with current real estate values. Property insurance policies also often cover lost or damaged personal property and provide a stipend for temporary living expenses.

Having to pay out so many claims at once can strain the finances of private insurance companies, especially if they don’t have enough cash on hand. Though they often have a portfolio of policyholders across the country, insurance companies are regulated at the state level, which limits how much they can spread the risk. In California, there’s currently a moratorium preventing insurance companies from dropping existing customers.

The fires are likely to force lasting changes on the insurance sector as companies try to navigate so many constraints, though the full extent of the impact won’t be clear for a while. It’s likely that more private insurers will raise their premiums or cut their coverage. For homeowners, that means higher living expenses, losing their mortgages, moving somewhere else, or facing the next calamity unprotected.

While California’s insurance system and risk exposure is different from other states, it’s the fifth-largest economy in the world, so its fortunes will shift the financial outlook for the whole country. States like Florida and Louisiana are also facing similar pressures as rising claim payouts are making private insurers flee, forcing state-run insurers of last resort to shoulder more of the burden.

What happens when the insurer of last resort runs out of cash?

California FAIR Plan officials were well aware that a crisis like the recent Los Angeles wildfires was looming. FAIR Plan President Victoria Roach told state lawmakers last year that the number of properties covered under the program at the time had reached 375,000, more than double the amount in 2019. “As those numbers climb, our financial stability comes more into question,” Roach said. By September 2024, the number had risen to 451,799.

The FAIR Plan functions differently from conventional insurance systems. It’s a nonprofit, but it doesn’t use public money. Instead, private insurance companies in California are required to contribute in line with their market share. As such, it’s not an insurance company per se, but what’s called a syndicated pool.

The FAIR Plan only provides basic fire and smoke protection. It doesn’t cover other perils that are typical in a home insurance policy like hail damage, water damage, and personal liability. A homeowner still has to buy a private insurance policy to cover things not covered by the FAIR Plan in order to meet mortgage insurance requirements. An average FAIR Plan policy costs $3,200 per year, more than double the average homeowner’s insurance rate in California.

Even so, these premiums aren’t enough. The program has $377 million cash on hand. The FAIR Plan does have a $2.6 billion reinsurance plan to cover excess losses, but it only kicks in after $900 million in claims. Several small wildfires could wipe out its cash reserve and a really big fire could exhaust all of its coverage. The FAIR Plan has almost $5 billion in potential exposure in its insured properties in the fire-scorched areas. The total losses are likely to be much less than the total exposure, but it’s still creating a dicey situation as homeowners file claims.

“We’re a not-for-profit,” Roach said. “We don’t have a lot of money sitting around. Our rates are not adequate. I don’t think anybody thinks it’s a good model right now.”

What happens when it burns through its cash?

The FAIR Plan basically has two options, said Jerry Theodorou, who leads insurance research at the R Street Institute, a free market think tank. In the first, the FAIR Plan could issue an emergency assessment that requires private insurance companies in California to chip in to cover its losses. The last time it did that was in 1994 after the Northridge earthquake near Los Angeles. California Insurance Commissioner Ricardo Lara said last year that the chances of another assessment were “highly unlikely.” The private insurers can then pass some of the costs onto their policyholders with rate increases, but the bigger worry is that this could drive even more insurers to leave California or from certain risky regions in the state.

“People are panicking because it hasn’t been done in a long time,” Theodorou said.

The other choice is to issue bonds, effectively taking on debt. California Assembly Bill 226, introduced earlier this month, would allow the state to issue bonds to help pay for the FAIR Plan. But there are unanswered questions about how this would work.

“It’s not an unusual solution,” Theodorou said, noting that municipalities routinely use bonds to pay for expenses. “However, [the bill] doesn’t give any numbers.”

He noted that California has made some recent changes to stabilize its insurance market and that private insurance companies will likely come out of these fires intact since they can balance their books across their portfolios in the rest of the country. Some may eventually start coming back to California and take a bit of weight off the FAIR Plan.

However, property insurance payouts don’t tell the whole story.

Angelenos who couldn’t afford the FAIR Plan may end up on their own. According to LendingTree, nearly one in 10 homes in Los Angeles is uninsured. Renters are in an even more precarious position since insurance isn’t usually required to lease a property.

The local economy is also going to face lingering damage. “You have both direct business interruptions – some stores and commercial enterprises that are not able to operate — but you have indirect or multiplier effects,” USC’s Rose said. Companies may have to cancel orders, hope for supply chains to unsnarl, or wait for customers to come back. The scale of this disruption increases with the length of the recovery, and if businesses can’t hold out, they may shutter. On the other hand, some local enterprises like general contractors will get a boost from the reconstruction effort.

There are health effects to consider too. The fires sent lead and chlorine into the air and there are concerns that the detritus from the blazes could contaminate water supplies. Damage to public infrastructure like roads, powerlines, and sewers is borne directly by taxpayers.

As the region starts to recover, low-income residents will have the hardest time returning to normal, if they return at all. The fires will likely permanently reshape the character of communities in their wake, just as Hurricane Katrina altered the demographics of New Orleans, pushing out many minority residents with deep roots in the city.

This pattern is playing out in the wake of other disasters as well, like 2024’s Hurricane Helene, as residents are still coping with toxic waste, a complicated insurance process, and an agonizingly slow recovery.

The ripples of costly calamities are spreading everywhere across the country, and ultimately reach all of us in ways we might not be able to measure.

Reducing wildfire risk is going to be expensive and messy

Wildfires are a natural part of the ecosystem in much of California, but as more people live in areas prone to burning, they increase the chances of starting a fire and expand the scale of the devastation that does occur. But according to Verisk’s Guin, “In the case of wildfires in California, I believe it can still be managed.”

However, the to-do list is long. One task is to enact and enforce stricter building codes. That means cutting back flammable vegetation and using more fire-resistant materials to harden homes. But it also requires thinking beyond individual homes and looking holistically at how neighborhoods are built in the first place.

“It’s like when we talk about immunity for vaccination,” said Michele Barbato, a professor of structural engineering at the University of California Davis studying disasters and construction techniques. “If you have enough homes that are resilient to fire, you’re going to save the community. Everybody will be protected, even homes that are not up to standards. But if you have too many homes that are actually prone to burn, they will bring down the entire community.”

The problem is that this approach raises the costs of rebuilding and makes the timeline longer at a moment when thousands of people are desperately trying to get back to their lives. It requires careful planning. It also means that not everyone gets to go back where they were, which will be unpopular politically.

The state will also have to invest more in reducing wildfire risk. That means thinning flammable vegetation, training more firefighters, and bolstering water infrastructure. California needs to break through its housing shortage and create a suite of policies that encourage more affordable homes in safer regions rather than sprawling into the wildland-urban interface. That will require changing some permitting rules, zoning laws, and environmental regulations, which is already controversial. Insurance companies also need more leeway from lawmakers to set their rates in line with the actual risks they face.

And over the long term, California and the rest of the world will have to work together to limit climate change. This is all going to be expensive and contentious, but it’s a more sound approach than simply reacting to devastating disasters. We can either pay up front on our own terms to adapt to and mitigate threats, or we can pay even more down the line when the next major catastrophe strikes.

Update, February 12, 2025, 11:25 am ET: This story was originally published on February 3 and has been updated to include new information including a billion-dollar bailout for California’s FAIR Plan and that insurance companies such as State Farm have sought approval from California to increase the costs of their insurance policies for homeowners and renters in the state.