Beyond Reach

When the smoke and ash cleared after the 2018 Camp Fire in Paradise, California, 15,000 homes had been completely destroyed.

Seven years later, only 3,550 have been rebuilt. Of the rest, nearly 20% of the town’s homeowners lacked adequate insurance coverage to rebuild. California’s FAIR Plan, a property insurance market of last resort, insured about 9% of the homes and businesses in Paradise. FAIR Plan premiums, however, cost $3,200 annually on average, more than double the state’s average of $1,480 for privately placed property insurance. Many people who could not afford private insurance or the FAIR Plan simply went without coverage.

Hundreds of miles separate Paradise from the diverse middle-class suburb of Altadena, California, where an estimated 9,413 structures were destroyed by the Eaton Fire in January. Some 958 homes in Altadena were covered by the FAIR Plan, up 28% from the prior year, according to FAIR Plan data. Figures are yet to be compiled on how many people were uninsured in Altadena, but given that approximately one in 10 (154,108) homes in Los Angeles are uninsured, according to LendingTree estimates, more than a few of them may be located in Altadena. Losses from the wildfires that Los Angeles endured in January weren’t limited to residences. The UCLA Anderson School of Management projects $297 million in wage losses for businesses and employees in impacted areas, which are home to thousands of businesses.

Coverage Increasingly Out of Reach

For economically disadvantaged homeowners near or below poverty levels in California and across the country— people who for the most part have lower incomes, higher debt, and low FICO credit scores—the alarmingly high cost of property insurance is increasingly beyond their ability to afford. According to a multiyear study by the Federal Reserve Board, Harvard Business School, and Columbia Business School published in December 2024, 65% of the U.S. population is underinsured.

“For the longest time, we have not been able to quantify exactly how underinsured people are and to what degree they purchased coverage to protect them against wildfires, hurricanes, tornadoes, and other natural disasters,” says study co-author Ishita Sen, an assistant professor of business administration at Harvard Business School. “Now we have an idea of the magnitude of the situation and the news is staggering.”

Sen says that most people within the 65% cohort reduce their coverage to ensure a low, fixed-amount premium. Losing a job, a medical emergency, or a mortgage loan default often compels a “Sophie’s Choice”—putting food on the table or buying sufficient homeowners insurance. “They convince themselves that their homes won’t be susceptible to a disaster or if one strikes, the damage will be minimal, and FEMA will make them whole,” says Sen. “The reality is otherwise.”

The Federal Emergency Management Agency provides up to $43,500 in grants to homeowners who lose their homes in a natural disaster, not nearly enough to rebuild a house that burned to the ground, Sen says. “Even average Americans lack enough savings for such events in life. Households, lenders, and taxpayers face far more uninsured risk than we all realize,” she says.

More than one in 13 homeowners in the United States have no property insurance at all, according to a 2024 study by the Consumer Federation of America (CFA), a nonprofit research, education, and consumer advocacy organization. That represents about 7.4% of all homeowners in over 6 million uninsured homes nationwide, despite the risk of more frequent and financially severe hurricanes, tornadoes, wildfires, and convective storms. Over 20% of households living in poverty do not have homeowners insurance, compared to just over 5% of households not in poverty, the CFA found in its analysis of 2021 American Housing Survey data.

Breaking it down further: Homeowners earning less than $50,000 per year are twice as likely to have no insurance compared to the broader population. Among lower-income homeowners, 15% lack coverage. Demographics plays a role, with Native American, Hispanic, and Black homeowners disproportionately at risk of “going bare”—forgoing any property insurance.

Nineteen percent of homes valued at no more than $150,000 were not insured, CFA said. That dropped to 5% or less for homes worth more than that amount.

“Being uninsured can foster deeper economic precarity for millions of homeowners across the country, especially those with lower incomes, and is an important contributor to racial inequality,” the report says. “Inequalities in who has homeowners insurance will likely widen the long-standing racial wealth gap.”

The study found that $1.6 trillion in U.S. home property value is uninsured. “When millions of families simply cannot find or afford insurance coverage for their home, we are all exposed,” Douglas Heller, CFA director of insurance, warned in a press release announcing the organization’s findings.

Louisiana serves as evidence of what happens to low-income victims of a natural catastrophe. A 2006 study in the journal Ecological Economics found negative correlation between people living in poverty in New Orleans when Hurricane Katrina struck the year before and homeowners who had flood insurance. “This suggests that city planning districts that had a high percentage of poverty also had a low percentage of flood insurance coverage,” the paper states.

Uninsured or underinsured victims of Hurricane Katrina faced ongoing challenges that their fully insured peers may have been able to avoid, findings show: “For example, the Road Home homeowners’ assistance program only began accepting applications in October 2006, more than a year after Hurricane Katrina struck, leaving underinsured homeowners in temporary housing for extended periods,” according to a 2014 research paper published in Social Science Quarterly.

Small Business Shutdowns

Small, low-margin businesses are not immune to this profound disruption. According to FEMA data, 43% of small businesses affected by a weather-related disaster fail to reopen and an additional 29% go out of business within two years of the event. FEMA does not define a “small business,” relying instead on Small Business Administration (SBA) size standards to determine if a business qualifies for disaster assistance. SBA standards are based on factors including the number of employees and average annual receipts. FEMA’s data does suggest that low-income applicants are more likely to be denied assistance and that those with insurance recover faster.

Running a small business is risky even without external threats. Roughly 20% are permanently shuttered within a year of opening for business and half close within five years, according to 2024 data from the U.S. Bureau of Labor Statistics. Average income for self-employed owners is $26,084 for an unincorporated business or $51,816 for an incorporated small business, according to data cited by USA Today. But even that top number could leave small business owners struggling based on the cost of living of many urban areas.

The number of small businesses shuttered by the wildfires in Los Angeles was unavailable at press time. As of September 2024, the FAIR Plan had 13,101 commercial policies in force—though how many of those covered small businesses also could not be immediately determined. That number was up 161% from 5,010 commercial policies in force in September 2024. But those figures pale in comparison to the count of FAIR Plan dwelling policies in force, which spiked 123% from 202,897 in September 2020 to 451,799 four years later.

The effects of a natural disaster on businesses range from damage to property or materials from a direct hit to supply chain disruptions or reduced operating hours even if the impact is less immediate, the Federal Reserve Bank of Richmond noted in November 2024, after Hurricane Helene struck the southeastern United States.

The impacts can be particularly dire for small businesses, which likely lack the resources, capital, and larger number of locations that can insulate their larger counterparts from potentially ruinous harm from a natural catastrophe, Inc. magazine noted last fall.

“Potential knock-on effects from damage to small businesses could also create challenges that extend to the broader economy,” McKinsey stated in an October 2024 analysis following Hurricanes Helene and Milton. “Micro-, small, and medium-size enterprises (MSMEs)—defined as enterprises with fewer than 500 employees—collectively play a major role in powering the U.S. economic engine.”

While acknowledging it would be impossible to tally exactly how many small businesses sustained some form of damage from the two storms, McKinsey made clear there was significant potential for extensive harm.

The 34 counties in Florida impacted by Hurricane Milton encompass nearly 60% of the MSMEs in the state, the analysis says—that is 1.9 million businesses with roughly 4 million employees. The swath of impacted industries was similarly broad, encompassing healthcare, construction, real estate, manufacturing, and others.

Further up the East Coast, 39 counties in North Carolina affected by Hurricane Helene are home to 45% of the state’s MSMEs, McKinsey found— roughly 471,000 businesses with 1.1 million employees.

Most small businesses are insured for property damage, but are only partially covered, says Ben Collier, associate professor of risk management and insurance at Temple University. He cites flood insurance provided through the National Flood Insurance Program (NFIP). “NFIP covers property damage losses but not the impact of a business interruption resulting in significant revenue disruption while the business owner waits for the structure to be rebuilt,” Collier said.

Reopening the business in another location is an option to keep revenue flowing, assuming the distance isn’t too far for current customers to travel. Other options include applying for a disaster recovery loan from the Small Business Administration to fund repairs after a climate-related disaster. There’s a hitch, however. Collier explains: “While the loans help address the liquidity problem that businesses can’t solve, people need to show they have a good likelihood of repaying the debt. Since SBA loans are based on credit scores and monthly cash flow budget considerations, only half the number of people that apply receive the loans.”

That is not necessarily the only complication. The Small Business Administration did not have enough funds to quickly provide loans to some businesses damaged by Hurricane Helene, forced to wait for additional funding from Congress, according to local news coverage at the time. That left some businesses in limbo for weeks to months.

Bloated FAIR Plans

In the weeks since the Palisades and Eaton fires, the economic cost and insured losses caused by the disasters have been attributed to climate change, misaligned city budget priorities, delayed fire suppression, an increase in the built environment, wildfire-susceptible houses, poor land and water management, insurers that departed the California market, and the state insurance regulations that compelled their exit. There is some truth to all the assertions.

For nearly four decades, homeowners insurance in California was priced below the risk of wildfire due to Proposition 103, the state regulation formally known as the Rate Reduction and Reform Act. The rule limited how much insurers could increase rates without a public hearing, discouraging them from raising prices frequently. Although catastrophe models posited more frequent and severe wildfires ahead, insurers could not include this data in their underwriting and pricing. Nor could they include the rising cost of the reinsurance they bought to spread their risks.

Two years ago, two of the largest insurers in the state, State Farm and Allstate, stopped selling and renewing many homeowners insurance policies. Another large carrier, Farmers Insurance, temporarily non-renewed its homeowners policies. Altogether, seven of the top 12 insurance companies in California either pulled back from offering new policies or pulled out of the market entirely. The insurers attributed their decision to Proposition 103, criticizing it as an outdated regulation that failed to account for rapidly increasing wildfire risks.

The loss of this massive amount of risk-bearing capital in the state forced hundreds of thousands of homeowners into the higher-priced FAIR Plan. Of the 1,600 homeowners policies that State Farm non-renewed in July 2024, around 1,400 ended up in the FAIR Plan, according to the California Insurance Department.

The plan’s total financial exposure is $458 billion, tripling from September 2019 through September 2024. It is expected now to grow by at least another $4.7 billion, since 22% of the structures affected by the Palisades Fire and 12% of the structures affected by the Eaton Fire were insured in the plan, according to California Department of Forestry and Fire Protection (CAL FIRE) incident maps.

Although state-sponsored, the FAIR Plan is not state-subsidized. Rather, the plan’s losses are shared by property and casualty insurers operating in California. If the plan runs out of cash and reinsurance (at press time it had $200 million in cash and $2.5 billion in reinsurance), the state steps in and charges assessments to the insurers for the shortfall. Carriers can then pass on the cost of the assessments to California consumers by charging higher premiums, making coverage more expensive for homeowners, especially those who are economically distressed.

Meanwhile, homeowners insurance rates are expected to increase significantly following a landmark regulation signed by the state’s insurance commissioner, Ricardo Lara, on Dec. 30, 2024, eight days before the massive wildfires first erupted. The rule obviates key aspects of Proposition 103, allowing insurers to use wildfire catastrophe models in setting rates and to treat reinsurance like other carrier expenses. In return, insurers must increase the number of property insurance policies they write in wildfire-prone regions in California by 5% every two years until they reach the equivalent of 85% of their statewide market share.

While many homeowners and businesses in the high-priced FAIR Plan will now be able to buy more coverage at lower cost in the private insurance market, homeowners and businesses not in the FAIR Plan are likely to pay more. The nongovernmental Consumer Watchdog estimated that the total 9 million homeowners living in California will pay an average $1,100 in additional premium annually if the FAIR Plan assesses private insurers $10 billion for costs related to the recent wildfires that are not absorbed by reinsurance.

Economically deprived homeowners may buckle under the financial strain, reducing their coverage or eliminating it altogether, adding to the ranks of the 10.5% of uninsured homes in California. A similar situation is expected in the other 34 states that have FAIR Plans, as climate change increases the frequency and severity of local weather-related disasters, forcing insurers to stop offering coverage, resulting in more of these markets of last resort assuming an ever-growing number of high-risk properties.

Following California’s landmark regulation, a major question is whether insurance companies, despite their newfound ability to charge higher premiums, will reenter the state’s homeowners insurance market. Given recent insured losses, they may decide otherwise, says Daniel Kaniewski, former FEMA deputy administrator for resilience. “Since they got all the regulatory changes they asked for, the insurers should not use the L.A. fires to back out of their statements that they would write new insurance in California because their models told them that there could be a catastrophic wildfire,” adds Kaniewski, managing director, public sector, at broker Marsh McLennan. “But they might.”

Harvard Business School’s Sen commends the regulatory changes in California but criticizes the state Insurance Department for waiting too long.

“California lured people and businesses into risky areas of the state with premiums that were low enough to make them think the risks were not high,” she says. “We cannot have a world where we don’t let insurance companies price their products based on the risks. The recent regulatory changes should have occurred at least 15 years ago.”

What Can Be Done?

One way to forestall the worst for disadvantaged homeowners and small businesses would be reimagining the purpose and structure of property insurance to further spread disaster risks. Reinsurance broker Guy Carpenter recently announced a project exploring the use of parametric insurance to spread wildfire and hurricane risks in California and Florida, respectively. Assuming the project proves feasible, primary property insurance costs would fall for insurers in both states, trickling down to reduce the number of people in their FAIR Plans.

The concept calls for developing a community-based parametric reciprocal exchange, an insurance model in which a community of homeowners or small businesses share natural disaster risks. Payouts are triggered automatically when specific, predefined measurable events or conditions, such as wind speeds or rainfall levels, are met.

Catastrophe bonds, a type of insurance-linked security that can spread wildfire and hurricane risks beyond private insurance and reinsurance markets, are another way to achieve the twin goals of shrinking FAIR Plans and reducing insurance premiums for insureds including small businesses and disadvantaged homeowners. Approximately 12% of the cat-bond market is exposed to wildfire risks above cumulative loss thresholds absorbed by underlying primary insurers and reinsurers. While Fitch reported on Jan. 24 that the Los Angeles wildfires will cause some cat bonds to experience partial losses, the aggregate losses will not impede cat bond issuance, the ratings agency stated.

Lastly, some form of government-run disaster insurance program to absorb catastrophic risks is on the table. “The creation of a federal catastrophe reinsurance structure is absolutely essential to manage the risk transfer we need in a world so dramatically transformed by climate change,” says Heller. “We need to recognize we just can’t follow the same path toward deregulation that began when the federal government officially passed regulation of insurance to the states.”

He’s referring to the McCarran-Ferguson Act of 1945, which exempted insurance companies from federal antitrust laws, with a proviso that states regulate insurance to ensure carriers do not impose excessive, inadequate, or unfairly discriminatory rates. In the 80 years since the act was passed, Heller asserts that many state regulators have failed to constrain carriers in this regard. “Insurance works when there is a mix of low risk, moderate risk. and high risk, so we can spread it,” he says. “The only way we can have economic security and community resilience as a functioning society is to think about property insurance more like a utility than a private sector product. Not everything has to be solved by the insurance market.”

Heller worked closely with then-Representative (now Senator) Adam Schiff (D-Calif.) in developing legislation (the INSURE Act) intended to establish a $50 billion federal reinsurance program for property insurance. The program would cover hurricanes, floods, wildfires, and earthquakes; cap insurers’ liability for catastrophic events; and address the challenges homeowners face in insurance affordability and availability. “The bill is structured to achieve the twin goals of providing insurers with a clear backstop for the extreme catastrophe risks they now fear and providing Americans with meaningful access to insurance coverage that we all need,” Heller says.

Insurers and reinsurers oppose the legislation, asserting that a federal property reinsurance program would shift fast-rising catastrophe costs to taxpayers. Filed in January 2024, the bill never got a House committee hearing before the 118th Congress ended. At press time, the bill had not been refiled.

Former California insurance commissioner Dave Jones thinks a narrower approach to federal reinsurance targeting homeowners who are forced into FAIR Plans makes sense.

“Our experience with bigger federal insurance schemes is not good,” he says. “The NFIP and Federal Crop Insurance programs require substantial and regular taxpayer-funded bailouts, are regressive, and [since their] rates do not reflect the risk, they don’t incentivize risk reduction. Federal reinsurance for FAIR Plans would help reduce FAIR Plan costs and the amount of rate increases needed as things get worse in the 35 states that have them.” (See Sidebar: Q&A with Dave Jones)

In the aftermath of a disaster that provoked horror and grief for hundreds of millions of people watching it unfold in real time, the unbearable possibility that our homes, too, could be next certainly begs new ideas. As Sen puts it, “Average Americans don’t have enough savings for such events in life, eroding the fundamental idea of home ownership.”