The LA fires cast light on climate change insurance crisis

The deadly Los Angeles infernos have laid waste to entire communities, forcing thousands of people to evacuate and destroying 16,000 structures, many of them homes.

It's likely to be one of the costliest wildfires in US history, with a preliminary estimate from AccuWeather projecting damages and economic losses of up to $250 billion (€239 billion). The US weather forecasting service calculated the costs based on factors like long-term cleanup, health and medical impacts, and shifting home values.

The fire and its aftermath have also highlighted how increasingly, climate change-related disasters are making homeowners' insurance unaffordable or inaccessible for many in at-risk regions.

California officials have had to announce a year-long moratorium on insurance companies dropping policyholders in areas affected by the LA fires.

"The home insurance system in the US is fatally flawed," said Moira Birss, a public policy researcher at the Climate and Community Institute, a US climate and economy-focused think tank. "The cost of damage that private insurers cannot or will not insure is either being borne by households and leading to individual financial ruin."

'Climate crisis is an insurance crisis'

In the US, yearly average homeowners' insurance premiums nearly tripled from $536 to $1,411 between 2001 and 2021, largely due to the increased risk in disasters related to planetary heating. They've risen highest and most rapidly in high-risk areas.

In many cases, coverage doesn't include events like fire and flooding, which are often sold separately. Renters are feeling the pinch too, as landlords are likely to pass costs onto their tenants.

"In some cases, we can be talking about many thousands of dollars extra per year. I see it as a working- and middle-class issue that is really widespread," said Zac Taylor, a climate finance expert at Delft Technology University in the Netherlands.

Insurance costs aren't just climbing in the US. In Germany, where floods are striking more often, home insurance premiums are predicted to double in the next 10 years. In Australia — frequently ravaged by wildfires and flooding — 15% of households are experiencing "home insurance affordability stress," which means they're plowing more than four weeks of their annual income into premiums.

Spiraling costs mean many living in at-risk regions are forced to choose between buying minimal insurance or foregoing it entirely. Moving is another option. But given the difficulty of upping sticks during a global housing crisis, many just stay put — with no insurance protection — even as disasters are becoming likelier.

In other cases, households decide to forego maintenance and retrofits, so they can afford insurance and other rising housing costs, said researcher Birss.

"When a big disaster hits, those homes are both more susceptible to damage, but also those residents might have fewer resources to recover with," Birss told DW.

Even if people can afford to shell out for homeowner and disaster insurance, major insurers are leaving high-risk regions in California and Florida in droves.

One consequence of this in the US is that without homeowners' insurance, it is impossible to get a mortgage and without a mortgage, most cannot buy a home. Another is even higher insurance premiums because the vacuum in the market is typically filled with smaller companies that take on the heightened risk in exchange for even more exorbitant fees.

"The climate crisis is an insurance crisis. We're at a tipping point. Many people in the US can actually no longer get insurance in the private sector," said Paula Jarzabkowski, an expert on the insurance industry from the University of Queensland in Australia.

Globally, rising prices and insurers exiting regions because frequent disasters threaten profits, have contributed to the "insurance protection gap." That's the difference between insured and uninsured losses. In 2024, global natural disasters, like hurricane Helene that hit the southeastern US as well as severe monsoon flooding in China, caused $320 billion in damages. Only $140 billion of that was insured.

Fixing insurance and reducing risk

In California, officials have urged insurers to remain in at-risk regions for now, but Jarzabkowski says this is not a long-term solution. 

Making insurance affordable and accessible would require taking a new approach to the entire industry rather than leaving insurance to the private market.

"We need to start moving beyond individuals and thinking of insurance as a societal good," Jarzabkowski said.

Designing comprehensive plans that cover all kinds of disasters and are widely available, if not mandatory — like how many countries approach health insurance — would help. Jarzabowski says that countries like Spain, France and Switzerland have taken this tack, often with state backing, to help spread risk and keep costs down.

Reforming insurance can help ease costs and support those struck by climate catastrophe. But more thoughtful risk mitigation, like climate-proofing houses with fire-resistant roofing or sturdy siding in hurricane and typhoon-prone regions would mean there's less to rebuild in the first place. This could also work for major public infrastructure and not just retrofitting individual buildings.

"In the Netherlands, there's a tradition of building strong physical infrastructure to deal with flood risk. Dikes, water gates, complex and large-scale infrastructure to physically reduce risk," said Zac Taylor.

"That means that most people living in the low-lying parts of the Netherlands, large parts of which are below sea level, don't have flood insurance. They just don't need it," he continued.

Another potential long-term solution is encouraging people to relocate to other areas, via initiatives like tax incentives and even state-funded buyouts of houses in disaster-prone areas.

Experts say a broader approach to risk and wider efforts to keep housing and insurance affordable and accessible will require significant state coordination and investment. But with rebuilding after a fire costing more than $100 billion, it could pay off.

"The more we build resistance, the less we need to rely on that safety net of insurance," said Birss.

Edited by: Jennifer Collins