The Times Australia
The Times World News

.
The Times Real Estate

.

The LA fires have prompted a reckoning for the insurance industry – Australian premiums could soar as a result

  • Written by Paula Jarzabkowski, Professor in Strategic Management, The University of Queensland




A series of wildfires in Los Angeles County[1] have caused widespread devastation in California, including at least 24 deaths and the destruction of more than 12,000 homes and structures. Thousands of residents have been evacuated, and the danger isn’t over yet.

Some estimates have put the cost[2] of the damage and economic loss at between A$400 billion and A$450 billion, of which only A$32 billion[3] is insured.

This is a stark illustration of the insurance protection gap – the difference between insured and uninsured losses. As California rebuilds, it means the bill for uninsured losses will fall on the property owners themselves and public funds.

These catastrophic fires should ring alarm bells in Australia, where global ripple effects are likely to force up our own insurance premiums. Most importantly, we must grapple with and prepare for the grim prospect of our own similar disaster.

Read more: LA is on fire. How will Australia cope when bushfires hit Sydney, Melbourne or another major city?[4]

Uninsurable homes

California’s insurance protection gap has grown as the state experiences increasingly devastating wildfires[5] year-on-year.

A firefighter directs a water hose at flames engulfing a chimney
Worsening disasters are making some parts of California too expensive to insure. Caroline Brehman/EPA[6]

In response to growing risk, escalating insurance claims, and rising reinsurance and construction costs, at least a dozen of the largest property insurers, making up 80% of the Californian market, have withdrawn from offering wildfire coverage[7] or have restricted new policies.

In March 2024, State Farm, the United States’ largest property insurer, announced[8] it would not be renewing about 72,000 policies in selected California postcodes deemed too risky to insure for wildfire.

These included 1,626 homes in Pacific Palisades[9], the scene of one of the most damaging recent fires.

For insurers, it’s simply becoming too expensive to do business in California.

What are the other options?

This has led to surging demand for alternative protection options. One, the California FAIR Plan[10], is a state-legislated collaboration between insurers.

The FAIR plan exists to provide a wildfire policy for those who have had policies refused by other insurance companies. But it’s a deliberately “bare-bones” policy.

Homeowners who want cover for additional structures, for theft and liability, or for other perils need to buy an additional top-up[11].

Residential payouts are capped at US$3 million (A$4.8 million), leaving many people underinsured.

Demand for the California FAIR Plan has skyrocketed[12] since 2019, up 164%.

This increased demand for protection and the billions of dollars in loss we’ve just seen have raised concerns these wildfires may bankrupt[13] California’s insurer of last resort.

The insurance protection gap is not unique to California. Some 15%[14] of Australian households already face extreme insurance stress – a situation in which it costs four weeks or more of pretax income to buy an insurance policy.

Composite image showing a bushfire on one side and a flooded house on the other
Rising premiums have pushed many Australian households into insurance stress. Dan Himbrechts, Darren Pateman/AAP[15]

Insurance for insurers

Premiums in Australia may soar even higher after the LA wildfires. Here’s why.

To cover large-scale losses like the 2022 floods in Australia[16], insurance companies buy a reinsurance policy in the global market. Essentially, they take out their own large insurance policies to help pay out the mass claims after a disaster.

The cost of global reinsurance capital goes up around the world as risk rises, losses increase, and the costs of reconstruction rise. Reinsurance payments for wildfire in California will therefore create a ripple effect[17] in all insurance markets.

The global reinsurance market isn’t the only thing likely to push premiums higher in Australia. There’s also our own climate uncertainty and increasing risk of disaster.

Future extreme weather and the losses it may cause are becoming harder to predict. Where uncertainty rises, so do premiums, as insurers and reinsurers increase their capital reserving[18] for potential losses.

Alarmingly, California’s crisis is a reminder that wildfires are not just a problem in rural areas or on the fringes of cities. Furthermore, these losses can even occur in winter, not just during the “wildfire season”.

Signage at a State Farm Insurance office
Last year, State Farm announced it would not be renewing about 72,000 insurance policies in California. John G. Mabanglo/EPA[19]

A timely warning

Australia may have been fortunate enough to avoid a catastrophic citywide fire so far. But the intensification of bushfire seasons[20] could ultimately create a similar insurance crisis here.

We’ve had our own sobering warnings in the past.

The 2003 Canberra bushfires[21] destroyed more than 500 homes[22] in suburban areas. In 2021, the Wooroloo fire[23] destroyed 86 homes on Perth’s northeastern fringe.

In 2019, the Gospers Mountain mega-blaze[24] came dangerously close to advancing on Sydney’s urban heart. A timely southerly wind change held it back.

It pays to check your coverage

What are the implications of this disaster for Australian insurance policyholders? Are there any meaningful actions we can take?

First, insured Australians should check what their policy covers and what is excluded. Greater clarification over exclusions was recommended in a recent parliamentary inquiry[25] into the 2022 floods.

Meanwhile, policyholders should review the terms and conditions in their product disclosure statement (PDS). If you’re unsure about what a particular policy covers, contact your insurer prior to renewal.

Beyond checking or upgrading coverage, Australians can take steps to make their homes more bushfire resilient.

Last year, the Resilient Building Council partnered with the federal government to launch a free app[26] homeowners can use to assess their fire resilience and earn premium reductions[27] from participating insurers by making improvements.

Above all, Australians need to be aware that under a changing climate, we may be more at risk from fire than we realise[28], even in our biggest cities.

References

  1. ^ wildfires in Los Angeles County (www.theguardian.com)
  2. ^ cost (www.theguardian.com)
  3. ^ A$32 billion (www.abc.net.au)
  4. ^ LA is on fire. How will Australia cope when bushfires hit Sydney, Melbourne or another major city? (theconversation.com)
  5. ^ increasingly devastating wildfires (newsroom.statefarm.com)
  6. ^ Caroline Brehman/EPA (photos.aap.com.au)
  7. ^ withdrawn from offering wildfire coverage (abc7news.com)
  8. ^ announced (newsroom.statefarm.com)
  9. ^ 1,626 homes in Pacific Palisades (www.latimes.com)
  10. ^ California FAIR Plan (www.insurance.ca.gov)
  11. ^ buy an additional top-up (www.investopedia.com)
  12. ^ skyrocketed (abc7news.com)
  13. ^ bankrupt (www.npr.org)
  14. ^ 15% (actuaries.asn.au)
  15. ^ Dan Himbrechts, Darren Pateman/AAP (photos.aap.com.au)
  16. ^ 2022 floods in Australia (theconversation.com)
  17. ^ create a ripple effect (www.artemis.bm)
  18. ^ increase their capital reserving (www.swissre.com)
  19. ^ John G. Mabanglo/EPA (photos.aap.com.au)
  20. ^ intensification of bushfire seasons (theconversation.com)
  21. ^ 2003 Canberra bushfires (knowledge.aidr.org.au)
  22. ^ destroyed more than 500 homes (theconversation.com)
  23. ^ Wooroloo fire (knowledge.aidr.org.au)
  24. ^ Gospers Mountain mega-blaze (www.abc.net.au)
  25. ^ parliamentary inquiry (www.aph.gov.au)
  26. ^ free app (rbcouncil.org)
  27. ^ earn premium reductions (minister.homeaffairs.gov.au)
  28. ^ more at risk from fire than we realise (theconversation.com)

Read more https://theconversation.com/the-la-fires-have-prompted-a-reckoning-for-the-insurance-industry-australian-premiums-could-soar-as-a-result-247207

The Times Features

Dental Implants vs. Dentures: Which Is Better for You?

When it comes to replacing missing teeth, two of the most common options are dental implants and dentures. Both have their advantages and disadvantages, so choosing between them ...

What Neck Pain Really Means (And Why It’s More Than Just Poor Posture)

Neck pain is often brushed off as something temporary — a tight spot after a long day at the desk or a poor night’s sleep. But when the discomfort keeps returning, it could be a ...

The Work of Gosha Rubchinskiy: Fashion, Culture, and Youth

From Designer to Cultural Architect Gosha Rubchinskiy is not just a fashion designer—he's a cultural force. Born in Moscow in 1984, Rubchinskiy began his career in fashion in t...

The Power of Community: How Support Services Improve Lives for People with Disabilities

(Source) Community extends beyond geographic boundaries because it creates a sense of belonging, where individuals become both visible and heard through supportive networks. A sui...

Aluminium vs. Steel Ladders: Which One is Best for Your Needs?

(Source) Every homeowner who reaches the attic for cobwebs alongside professional tradespeople finds reliable ladders essential for their work. A comparison between aluminium ladd...

A Parent’s Guide to Choosing the Best Children's Dentist in Bendigo

(Source) Selecting the correct dentist for child dental care seems complicated because you want someone who delivers excellent medical care while handling children effectively. Be...

Times Magazine

The Essential Guide to Transforming Office Spaces for Maximum Efficiency

Why Office Fitouts MatterA well-designed office can make all the difference in productivity, employee satisfaction, and client impressions. Businesses of all sizes are investing in updated office spaces to create environments that foster collaborat...

The A/B Testing Revolution: How AI Optimized Landing Pages Without Human Input

A/B testing was always integral to the web-based marketing world. Was there a button that converted better? Marketing could pit one against the other and see which option worked better. This was always through human observation, and over time, as d...

Using Countdown Timers in Email: Do They Really Increase Conversions?

In a world that's always on, where marketers are attempting to entice a subscriber and get them to convert on the same screen with one email, the power of urgency is sometimes the essential element needed. One of the most popular ways to create urg...

Types of Software Consultants

In today's technology-driven world, businesses often seek the expertise of software consultants to navigate complex software needs. There are several types of software consultants, including solution architects, project managers, and user experienc...

CWU Assistive Tech Hub is Changing Lives: Win a Free Rollator Walker This Easter!

🌟 Mobility. Independence. Community. All in One. This Easter, the CWU Assistive Tech Hub is pleased to support the Banyule community by giving away a rollator walker. The giveaway will take place during the Macleod Village Easter Egg Hunt & Ma...

"Eternal Nurture" by Cara Barilla: A Timeless Collection of Wisdom and Healing

Renowned Sydney-born author and educator Cara Barilla has released her latest book, Eternal Nurture, a profound collection of inspirational quotes designed to support mindfulness, emotional healing, and personal growth. With a deep commitment to ...

LayBy Shopping