Low-risk homes are caught up in California's climate insurance crisis

(Bloomberg) --As another wildfire season looms, insurance companies have abandoned some California neighborhoods at lower risk of burning, forcing tens of thousands of homeowners to obtain bare-bones coverage from the state's insurer of last resort. 

California intended the insurer, called the FAIR Plan, as a backstop for homeowners unable to secure insurance on the private market because they live in areas of the state classifies as at high risk for wildfire due to vegetation, terrain and weather. Between September 2024 and December 2025, enrollment in FAIR surged 43% as insurers pull back from California following a series of catastrophic wildfires, including last year's $40 billion Los Angeles inferno. 

But in a sign insurers have curtailed coverage even in places less likely to face wildfires, 14% of current FAIR policies are for properties largely in urban zones with low fire risk, according to a Bloomberg News analysis of FAIR plan data, with 28% of the cash-strapped plan's exposure now in those areas. 

"What we're seeing is that the infection of the market that existed in the high-fire-risk areas has spread into the normal parts of the market," said Michael Wara, director of the climate and energy policy program at Stanford University.

A spokesperson for the FAIR Plan declined to comment.

California's climate-driven insurance crisis has spawned efforts to reform the state's highly regulated market, where it could take insurers a year or more to obtain required approval for a rate hike. Regulators have pledged faster turnarounds and the granting of rates that reflect growing wildfire risks to incentivize insurers to expand coverage in high-hazard areas. But in the wake of the LA fires that destroyed 12,000 homes and left burned-out homeowners fighting insurers to get claims paid, state legislators are now seeking to impose new mandates on the industry to correct inequities revealed by the disaster. 

Experts say California could prove a testing ground for a carrot-and-stick approach to preventing the collapse of insurance markets as growing wildfires, hurricanes and other climate disasters shake up the industry in other states. 

"The insurance market right now is in a fragile state," said Mark Sektnan, vice president for state government relations at industry advocacy group American Property Casualty Insurance Association. "The decisions that the legislature makes through the laws that they pass could make California either appear to be a more encouraging market or less encouraging market for insurers wanting to come back."

One recently introduced bill would require insurers to provide and renew policies in high-risk areas for homeowners that make their dwellings more fire-resilient or risk being suspended from doing business in California for five years. Many LA homeowners discovered they were severely underinsured and other legislation would order insurers to offer guaranteed replacement of a destroyed house.

A spokesperson for State Farm, California's largest insurer by market share, declined to comment. 

Another bill, backed by California Insurance Commissioner Ricardo Lara, would allow the FAIR plan to offer comprehensive coverage. The plan, which now writes nearly 10% of residential policies in the state, currently can only provide fire insurance and homeowners must buy policies elsewhere to cover other damage. Experts say moving homeowners off FAIR and back to private insurers is key to restoring a healthy market but the legislation could make the plan a more attractive alternative than traditional insurance.

"The FAIR Plan was never designed to be as good as the protection that you can get in the private market because we don't want people on FAIR," said Amy Bach, executive director of United Policyholders, a San Francisco nonprofit that advocates for homeowners.

Michael Soller, a deputy California insurance commissioner, said the aim of the legislation is to provide homeowners the coverage they need when "they have to be on the FAIR Plan, but that needs to be short term."

A FAIR spokesperson said the plan is reviewing the bill but had no comment.

Sektnan said the growth of last-resort insurance in California, including in lower-fire-risk areas, is due in part to its relatively low premiums. "You can't depopulate the FAIR Plan if it's competitively priced or if it's priced lower than what's in the market," he said.

There are tentative signs, though, that access to the private market is improving. After breakneck growth in the FAIR Plan since 2024, enrollment increased by less than 4% in the final three months of last year. The California Department of Insurance has recently approved or is currently considering rate increase requests from six major insurers under its "sustainable insurance strategy" that promises quicker reviews of proposals in exchange for commitments to expand coverage in high-risk areas.

"Insurance companies are coming into the department detailing their plans to actually stay and what we're seeing are initial signals of market turnaround and growth," said Soller.

For instance, the state's second-largest insurer by market share, Farmers Insurance Group, has asked for a nearly 7% rate hike. To secure that increase, it has pledged to market to 300,000 consumers living in high-risk wildfire zones beginning in 2026 and to add about 5,600 policies in those areas over two years, according to an insurance filing. The fifth-largest insurer, CSAA Insurance Group, noted in its 2025 rate request that it has issued 18,300 more policies in high-fire-hazard areas than the state requires. 

No. 3 insurer Mercury General Corp. set a target to add 15% more policies in high-risk areas over the next two years in its filing for a rate increase last year. The company said that its eight-year goal is to shift 6.5% of FAIR Plan policyholders to its own policies.

Insurance industry representative Sektnan said the market won't recover without even faster reviews of rate hike petitions as otherwise inflation erodes the value of premium increases. 

Testifying before a state legislative committee in February, Lara told lawmakers the insurance department has completed recent rate hike assessments in 120 days and now is targeting a 60-day review. "We are not out of the woods," he said. "A structurally healthier market is a 3–5-year project."

To contact the author of this story:
Todd Woody in San Francisco at twoody4@bloomberg.net