Wharton’s Benjamin Keys highlights the key lessons from the
California wildfires for policymakers, insurers, and homeowners.
The U.S. property insurance industry is resetting its business models as it struggles to absorb the losses caused by the California wildfires. Insurance companies face losses of up to $30 billion from the fires that began in early January. That number could get bigger, as major fires at two locations are still active. Insurers now want large premium increases of between 30% and 50%. Many insurers have declined to renew existing policies or write new policies in the Golden State, which they rate as one of the riskiest markets.
Insurers had just about begun recovering from the one-two punch last September-October that hurricanes Helene and Milton dealt in Florida and surrounding areas before the latest wildfires. “[In fact], 2025 was anticipated to be a year where insurance markets were going to normalize a bit, where we weren’t going to see the sharp increases that we’ve seen in the last few years,” Keys said.
The toll from Helene was 219 deaths and nearly $80 billion in damage, while Milton claimed 35 lives and caused $34 billion in damage, according to the National Centers for Environmental Information. At last count, the California wildfires had claimed 27 lives, scorched about 45,000 acres across 24 fires in Los Angeles County and surrounding areas, and destroyed more than 15,000 structures. Early estimates put the total economic damage at between $250 billion and $275 billion.
How Insurance Premiums Could Change
“Insurance companies have been very clear-eyed about climate change for a long time and the effect that has on their balance sheets,” Keys said. “And that will lead to higher premiums in risky areas. That’s what my research has borne out over these last few years. Insurers have sharply increased the ways in which they price disaster risk.” He predicted that living in a risky area will continue to get more expensive as climate change progresses.
On the flip side, the higher insurance premiums will be capitalized into house prices, which will lower their values, Keys said. “But regardless, the position that homeowners will be in is one of substantially higher premiums.” Incidentally, California’s insurance regulator introduced a reinsurance mechanism last December that requires insurers to increase coverage in high-risk areas.
Keys said it is an open question as to how much of the costs insurers can pass on to the rest of the country. In some states, local insurers could undercut national insurers seeking higher premiums, he noted. “Teasing out a direct mechanism [to pass on higher costs] across states is challenging for insurers.”
The insurance market is also unequal between homeowners and commercial property owners. “There’s been less effort among policymakers to make the lives of the business community easier when it comes to finding affordable insurance,” Keys said. “For homeowners, the state insurers of last resort have been more generous and more accessible.” Multifamily developers faced with higher insurance premiums will find it costlier to develop new apartment buildings, he added.
Insurance regulation also ends up narrowing choices for homeowners. Insurance is a state subject with varying degrees of regulation, and more regulated states are generally more affordable than less regulated states, Keys pointed out. “We have 50 different regulatory entities that regulate this market across the country,” he said. “And they’re all grappling with this tension between access and affordability.” Insurers are “extremely mobile,” and they have left those states where they have been more tightly regulated, and where they have had less discretion in setting premiums, he noted.
The Emerging Shape of Recovery
As communities begin to recover from the fires, they have many incentives to rebuild in the same locations. “There’s a desire among local municipal governments to rebuild their tax base, and there are the warm and fuzzy feelings that we get in saying that we’ve rebuilt bigger and better in the same locations,” he said. “But we know that that’s not often the right strategy. It’s likely that we’ll rebuild with higher quality and more durable materials.”
The affected communities should also follow the “playbook for wildfire prevention” where they maintain buffer zones to protect their urban spaces, Keys said. “We can learn some lessons and rebuild in a smarter way that increases density in some of the safer locations and creates buffer zones elsewhere.”
Land use policies also have to get smarter. “Over the last few decades, land use policies have encouraged building in the suburbs and in the exurbs, with cities blocking increased densification,” Keys said. “[Such policies] push developers further away from the city centers and into the areas that are most wildfire prone. And so, a big challenge going forward is, in an environment where we’re going to see more frequent fires, how can we encourage development in those denser, safer locations, and try to steer clear of some of the riskiest spots.”
Some sacrifice is also in order, according to Keys. “There’s another layer of wildfire prevention that is hard to do when it comes to removing all the landscaping around properties,” he said. “People need to give up their yards. Roads and shrubbery need to be cleared in a way that’s just not very appealing to the eye. And so, there is something we’re going to have to give up, going forward, if we want to really harden communities against wildfires.”
Regulators, too, have a role in helping create an environment that works for both insurers and homeowners. For one, policymakers could try to resolve “a real tension” between homeowners and insurers over a duration mismatch. Insurers write annual contracts and can quickly readjust their risk profile, while homeowners look forward to living in their houses for the rest of their lives, potentially, Keys explained.
“Policymakers will have to collaborate with the industry and with researchers to consider ways to both keep sending price signals to markets on risky places to live and to develop, but also find ways to support the lowest-income homeowners in our communities who might not have the flexibility if premiums rise,” he added.
In order to be better prepared for premium shocks, policymakers and homeowners must watch market signals on climate change, Keys advised. “That means that we should invest in being more resilient, in home-hardening and community-hardening efforts, whether that’s for floods or wildfires or otherwise, and rethink where we’re developing. We should be thinking about the most vulnerable communities and about ways to bring together policymakers, industry, and researchers to give people some sort of a toolkit in order to defray some of these challenges and help them.”
