LA's Hurricane Andrew

The fires will trigger increased shifting of risk to individuals. This time, federal support is uncertain.

This week, President Trump told Sean Hannity that "Los Angeles has changed everything," that he would "rather see the states take care of their own problems," and that "FEMA is getting in the way." Major reform of FEMA is undoubtedly ahead, with the Project 25 report signaling that the Trump administration will "shift the majority of preparedness and response costs to states and localities instead of the federal government."

Because of the LA fires, the Golden State will now be forced into a sudden moment of institutional and market change, akin to what happened in Florida more than thirty years ago following the disastrous arrival of Hurricane Andrew. This time the disruption will likely be more extreme, because the uncertainty of federal support will amplify the effects of these shifts on both residents and local government budgets.

It's a good thing California already leads the way as a state taking on greater responsibility for climate adaptation, because they're going to need all the creative capacity they can harness to get through this—and then they'll have to keep adjusting forever. They should start now by focusing on lowering physical risks to Californians by limiting building in risky areas and requiring adherence to stiff building code requirements.

After Hurricane Andrew slammed into Homestead, Florida on the morning of August 22, 1992, causing between $20 and $35 billion in insured losses in 2025 dollars, at least seven insurance companies went under and dozens stopped doing business in the state. The Florida Guaranty Fund, a state-managed pool of funds from insurance companies, couldn't cover the unpaid claims of the insolvent insurers. The state stepped in to stabilize the insurance market, authorizing the Guaranty Fund to float a $500 million bond and creating two additional public backup insurance pools for Floridians that were later combined to form Citizen's Property Insurance Corporation, now the state's insurer of last resort. After insurers announced a cascade of non-renewals, the state forced companies to slow their retreat from the state for several years.

It's fair to say Florida's insurance market dislocation started with Andrew, more than thirty years ago, and hasn't stopped since. Today, major companies' share of the Florida market is far lower than it was prior to Andrew, premiums continue to climb, and one source claims that 15-20 percent of Florida homeowners choose to go without insurance rather than pay realistic rates. Citizens is now the largest insurer in the state by far, despite aggressive "depopulation" efforts.

In California, the state's insurance troubles began long before this month. But, just as with Florida's Hurricane Andrew, the 2025 LA fires will likely be a turning point for insurers operating in the state, and the burdens will fall on people living there. California is rushing to send $2.5 billion in state funding to LA recovery, and the state legislature is quickly considering a bill that would let the bloated, exposed state insurer-of-last-resort, the FAIR Plan, issue catastrophe bonds to help finance claims.

Neither of these moves is aimed at actually lowering physical risks for people who live in California: The funding will cover cleanup from the disaster, and the bonds are debt for which Californians will be ultimately responsible.

Back to Andrew. Even though Florida initially tried to block major national insurers from leaving, they left eventually, and they have continued to exit. Smaller, less solvent, more entrepreneurial insurers have taken their place. The national names you've heard of, State Farm, Progressive, and Allstate, all have puny market shares in Florida ranging from 3 to 7 percent as of 2023, according to S&P Global.

Similarly, now California will likely do what it can to keep insurers around, but they may leave anyway—or be replaced by less-desirable players. The California Department of Insurance reports that between 2020 and 2022 insurance companies declined to renew 2.8 million homeowner policies in the state, over half a million of which were in LA County, and that's a trend that will be very difficult to slow. In the long run, both national and regional insurers will likely reshape their approach to the California market after they limp through the immediate claims-paying process (one that researchers for the Federal Reserve predict will include systematic underpayments on the scale of hundreds of thousands of dollars per household). To the extent nationally-known home insurance remains available, it may be expensive and provided in ways designed to evade state oversight—Bloomberg's Leslie Kaufman has done extensive work explaining this phenomenon. Or it may be provided by smaller, lightly capitalized insurers willing to take short-term high risks in exchange for high premiums—the story in Florida.

From the perspective of a major insurance company, it is looking less worthwhile all the time to do business in California. Sure, the insurers will likely be able to pass on any FAIR Plan assessments to their policyholders. And they recognize that the state's insurance regulator has adopted reforms aimed at allowing them to raise their rates to reflect the cost of reinsurance and the risk predictions generated by forward-looking models. But the continued threat of assessments, combined with continued regulatory constraints on their ability to raise premiums, may be too much for their investors to support.

The coming erosion of the insurance market in California may feel like a slope rather than a cliff, but the general move will be sharply downhill.

Case in point: State Farm Mutual Automobile Insurance Co. (Illinois), the country's largest car and home insurance provider, has already taken organizational steps designed to protect itself from exposure to the California market: it has a subsidiary, State Farm General, that does business only in California—which means that the child's exposure is both concentrated and kept distant from its corporate parent's books. This move, cordoning off a state-specific sub from a parent, became much more popular following Andrew.

State Farm General today is the largest private home insurer by far in California, with about a 20 percent market share according to S&P. After State Farm General reported a net loss of $880 million in 2023, its credit rating was taken down a substantial notch by A.M. Best, which rated its balance sheet as "weak."*

It filed a request with the California state regulator to raise its homeowners' insurance rates by 30 percent last November, telling the state that it needed to do so "in order to protect [its] solvency." State Farm General had begun withdrawing from the state's home insurance market long before the fires, ceasing to issue new policies in May 2023 and saying in March 2024 it wouldn't renew 30,000 policies across the state. The planned non-renewals included nearly 70 percent of its policies in Pacific Palisades. (In response to the LA fires, the company recently "paused non-renewals" for homeowners across Los Angeles County.)

It is hard to say what exactly is causing State Farm General's financial softening, but its concentrated risk, the difficulty it has charging realistic rates, and the skyrocketing cost of reinsurance may have something to do with its problems—as well as the costs involved in rebuilding expensive California real estate. Now it faces claims stemming from the destruction of thousands of high-cost homes in zip codes in which State Farm General was covering something like a third of homes.

The reputational risk of having a subsidiary go under may be too much for its parent, State Farm Mutual—all those shiny red ads are aimed at having people trust in the company, making them helplessly hum "State Farm is there" under their breath—and so the parent may be moved to inject capital into State Farm General to keep it going. But that's just a short-term fix (and one that happened a couple of times after Andrew). State Farm is not making any promises about sticking around in the long run.

Meanwhile, as in Florida following Hurricane Andrew, the reinsurance market will change in California. According to the FT, reinsurers are expected to "absorb less than 3 percent of insured losses from the blazes." Those reinsurers have invested in good modeling, know the risks, and aren't interested in backing up primary insurers serving Los Angeles County who can't pay their charges. Reinsurers, unlike primary insurers, aren't subject to state rate regulation. That's the real price signal, one that is likely still being muted by California's strenuous efforts to keep property markets going.

Following Andrew, a fleet of new reinsurers ("The Class of 1993") set up shop in Bermuda to provide risk-shifting capacity beyond the reach of US courts to primary insurers. Similarly, the reinsurance market will be back serving California, but only at prices that make sense.

The fact that reinsurance, a vital part of this entire story, remains scarce and expensive in California means that primary insurance companies like State Farm General have few places to send their risk, which means that high-risk areas in California will be increasingly uninsurable, which means that property values will suffer—another hit for Californians and local government finances.

There's great uncertainty ahead for the state: Will the second Trump administration reimburse fire-related costs? The last time around, in 2018, post-Camp Fire reimbursement was initially blocked until aides persuaded the president that people in Orange County had voted for him. The federal government can no longer be relied on to be a backstop.

All the state's efforts so far—raising money to support the FAIR Plan, sending money in for cleanup, making it easier for insurance companies to charge more—are aimed at mopping up the debris and keeping the mortgage machine going. The shell game is ending. California, in continuing to allow risky residences and assuming that someone else will cover the cost down the road, is shifting enormous amounts of risk onto its residents.

Will California take the lead on actually reducing physical risks to Californians? They might as well. The cavalry is not coming.

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*To the extent there is humor in credit rating reports, you can find it in this one: it says that State Farm General's credit benefits from "lift" provided by its parent. In other words, the vague presence of a solvent parent in the background is worth something, but no one is saying exactly what.