The catastrophic wildfires in Los Angeles highlight the ongoing homeowners insurance crisis in America, as climate change amplifies risks to properties, pushing insurers to reevaluate coverage prices.

For context: Between 2000 and 2013, insurance costs accounted for about 7% to 8% of an average mortgage payment. However, beginning in 2013, these premiums began to rise sharply. By 2022, insurance costs represented over 20% of the typical mortgage payment, according to data from analytics firm First Street.

Simultaneously, the underwriting profits for homeowners insurance companies have been in the negative nearly every year from 2017 to 2023, as noted in a recent U.S. Treasury report. The report indicated that “the paid loss ratio, which reflects substantial losses due to climate-related incidents, was the main factor affecting overall underwriting profitability during this time.”

“We face the reality of climate change; it’s not just a political issue but has real impacts, and insurance is where we’re starting to feel the consequences,” stated Amy Bach, executive director of the national consumer advocacy organization United Policyholders. “We are indeed in a crisis.”

Some of the most striking natural disasters—like the LA wildfires, as well as hurricanes Helene and Milton in late 2024—have mainly occurred in regions historically deemed high-risk, like coastal areas. Nonetheless, the escalating risks are predicted to eventually affect all Americans.

In response to rising insurance costs, state lawmakers and regulators, who are directly engaging with constituents about their challenges, are stepping up to explore solutions.

Many state insurance departments are testing various strategies for distributing risk and reducing costs, and experts in the industry are hopeful that these initiatives could become more commonly adopted. Below are some of the potential solutions.

Mandating discounts for risk-reduction measures

Efforts to make homes more durable against disasters, known as mitigation efforts, should benefit both insurers and homeowners. However, many homeowners struggle to receive recognition from insurers for their enhancements.

In Colorado, insurance commissioner Michael Conway expressed surprise at homeowners’ frustrations that despite upgrading their homes for fire resistance, they did not see any reduction in premiums.

“We often heard from modeling companies that they lacked enough data to gauge the effects of mitigation on their calculations,” Conway shared with YSL News. “In response, I’d say that’s completely unacceptable. For years, insurance companies have advised homeowners to reinforce their properties to keep insurance affordable.”

Democratic Colorado State Rep. Kyle Brown has previously proposed legislation on this issue and plans to do so again, as reported to a local CBS affiliate.

Homeowners in many coastal states prone to hurricanes should be aware that insurers are obligated to provide discounts for resilient measures, according to Mark Friedlander, director of corporate communications at the Insurance Information Institute, an industry trade organization.

Promoting community investment by insurers

Insurers have been criticized for their investments in fossil fuel sectors, which some consumer advocates argue contribute to the very damages that insurance must cover. Several states are now rethinking these investment strategies by encouraging insurers to reinvest in their local communities.

“In banking, we have the Community Reinvestment Act, which mandates that larger banks reinvest in the communities where they receive deposits. Imagine if insurance companies operated similarly,” suggested Sharon Cornelissen, director of housing for the Consumer Federation of America, a progressive consumer advocacy group.

By directing premiums towards community initiatives—possibly including climate resilience or other beneficial projects—insurers would establish themselves as partners and stakeholders in these neighborhoods, Cornelissen explained. Massachusetts, for example, launched a similar program in 1998 that lasted for 25 years. When it was due to expire, insurers opted to continue the initiative for another decade, said Tom Callahan, executive director of the Partnership for Financial Equity, a nonprofit that serves the financial services sector in Boston.

“They recognize the positive effects these investments have had in predominantly low-income communities and respond to that along with the financial incentive of achieving modest returns which can then be reinvested into future projects,” Callahan noted.

Massachusetts’ Property and Casualty Initiative has invested over $544 million since 1999, funding affordable housing and healthcare projects, among various others.

Avoiding suppression of premiums

California’s insurance landscape not only includes some of the highest-risk real estate in the U.S. but also suffers from significant deficiencies, including state laws preventing insurers from raising premiums to match their rising costs.

A 2024 analysis by the office of Democratic Governor Gavin Newsom found that the average cost of insuring a $300,000 home in California was $1,405 a month, significantly lower than Texas’s $3,851 and Florida’s $4,419.

“Years of rate-making restrictions created a suppressed market, encouraging continued population growth in areas highly susceptible to wildfires and subsequently limiting insurance options for consumers,” a representative from the American Property Casualty Insurance Association stated in an email to YSL News.

Additionally, California law previously prevented insurers from predicting future risks, relying instead on past data concerning natural disasters and other factors influencing insurance payouts.

Now, the state will permit insurers to utilize “catastrophic storm modeling” for pricing. “These reforms should help stabilize California’s market, although the recent wildfires have introduced significant challenges to the state’s insurance environment,” the spokesperson added.

Addressing preexisting conditions

The challenges in the homeowners insurance sector are not unprecedented. Commissioner Conway often reflects on the difficulties experienced during the initial phase of the Affordable Care Act’s health insurance marketplaces a decade ago.

“We faced dramatic premium increases,” Conway recalled. “Many insurance companies withdrew from the market due to uncertainties regarding risk pricing.”

However, with sufficient innovation across various states, health insurance exchanges have become stable and successful, turning into one of the more profitable markets for insurers, according to Conway.

Amy Bach of United Policyholders is somewhat skeptical about directly likening this to the ACA situation. While healthcare and health insurance indeed have bureaucratic complexities, the ACA—commonly known as Obamacare—compelled insurers to offer coverage regardless of “preexisting conditions,” which prevents them from solely choosing the healthiest applicants.

In property insurance, a “preexisting condition,” comparable to heart disease or cancer, could refer to living in a wildfire- or flood-prone area, or owning an older home, according to Bach.

She believes that Congress would need to intervene to stop insurers from selectively choosing customers. Despite previous legislative attempts for such reforms, she is doubtful that any current efforts will succeed in the current polarized political climate.

Extended grace periods for cancellations

As homeowners insurance costs rise, more Americans might struggle to pay their premiums on time. The insurance industry has begun using delayed payments as justification for not renewing policies, according to Cornelissen.

States might consider implementing longer grace periods before insurers can cancel policies. This is currently being discussed in Maryland, where clients may lose their coverage only 10 days after failing to make a payment.