At Least 30 Trillion Won Loss from 'LA Hwama'... California Faces 'Second Meltdown' as Insurers Withdraw

Private Insurers Withdrew After 2018 Wildfires
Reform Plan Prepared to Expand Market Share and Share Costs
Prepared Since Last Year... Now at Risk of Collapse Due to Wildfires

The estimated damage from the large wildfires in the Los Angeles (LA) area of the western United States is increasing day by day. The damage, initially estimated at $10 billion (approximately 14.5 trillion KRW) on the 8th, was updated to $20 billion (approximately 29 trillion KRW) the day before. In some areas, the wildfires have not yet subsided, so the scale of the damage could grow even larger.

Meanwhile, new conflicts are showing signs of emerging within the city. This is the conflict between the California state government and fire insurance companies. Due to the worsening California wildfires, many insurance companies have already withdrawn from the market, and this wildfire could further exacerbate the crisis.

Insurance Crisis Since 2018 Wildfires... Public Insurance Alone Is Insufficient

Debris of a building burned down in the LA area on the 8th (local time). Photo by Reuters-Yonhap News.

Even before this wildfire, California, which includes LA, was experiencing the largest-ever 'insurance crisis.' The spark of this crisis dates back to the 2018 wildfires. Those wildfires were also massive enough to be compared to the current LA wildfires, with astronomical damage costs.

Since then, private insurers have begun to withdraw from the California residential fire insurance market. For example, State Farm General, the largest private insurer in California, announced in March last year that it would not renew insurance contracts for 72,000 houses and apartments.

The gap left by private insurers must inevitably be filled by the state government. The state operates a public insurance program called the 'Fair Plan.' However, public insurance alone cannot fully cover the void left by private insurers, and there are even doubts about whether it has the capacity to compensate for the damages caused by this wildfire.

Prepared Reform Plan for a Year... Too Late, May Become Futile

The California Department of Insurance has been engrossed in developing a strategy for one year to overcome the local insurance market crisis, but it is at risk of being derailed by this wildfire. Screenshot from the California state government website

The state government has not just been standing by. According to the American new media outlet 'Vox,' the California Department of Insurance announced a major insurance market reform plan in January last year after nearly a year of careful preparation. This reform plan was a hard-won agreement after struggles among the state government, homeowners, and private insurers, stipulating that all private insurers must attract wildfire-risk area customers equivalent to 85% of the Fair Plan's market share.

For example, if the Fair Plan holds a 10% market share in a high fire-risk area, private insurers are required to cover 8.5%. In return, insurers can pass climate risks such as fire onto customers. This means homeowners will have to bear higher insurance costs. The core goal of last year's reform plan was to restore the broken insurance market by sharing the overall cost increase among the state, private insurers, and residents.

A local firefighter looking at the Hollywood Hills in Los Angeles, California, ravaged by wildfires. Photo by Reuters-Yonhap News.

The reform plan was scheduled to be implemented starting this year. However, the wildfire did not wait. The wildfire sweeping the western coast of California since the 8th has effectively nullified the state government's reform efforts and has raised concerns that it could push California's insurance market 'over the edge.'

According to the insurance information specialist media 'Reinsurance News,' the American investment bank group JP Morgan has already estimated the LA wildfire insurance losses at $20 billion. The most serious concern is that this wildfire has damaged homes in Malibu, California's representative affluent area.