Climate change is reshaping home insurance costs in California — and the rest of the U.S.

Insurance premiums were surging well before this year’s massive wildfires in the Los Angeles area.

Now, they are set to rise even higher as the L.A. wildfires could become the costliest blaze in U.S. history, analysts say.

The insured losses may cost more than $20 billion, according to estimates by JPMorgan and Wells Fargo.

For California residents, the increased frequency and severity of natural disasters has had a direct impact on homeowners insurance costs, a trend that is now even more likely to accelerate. 

“In the short term, insurance regulators need to allow for risk-based pricing,” Patrick Douville, vice president of global insurance and pension ratings at Morningstar, said in a statement. “This means that premiums are likely to increase, and affordability issues will continue, potentially affecting property values and leaving some homeowners without insurance.”

California’s Department of Insurance also recently passed regulations that pave the way for rate increases in exchange for increased coverage in wildfire-prone regions. In 2024, some insurance companies in the state hiked rates as much as 34%, according to the San Francisco Chronicle.

While it’s too early to predict how the fires in Southern California will directly impact the bottom line, filing one fire claim can increase premiums by 29%, on average, and two claims could boost premiums by 60%, according to a 2024 analysis by Insure.com.

Going forward, premiums are almost guaranteed to go up as insurers attempt to cover their costs, according to Janet Ruiz, a director at the Insurance Information Institute and the organization’s California representative.

“We have to take in enough money in premiums to pay out the claims,” she said.

But even for homeowners outside of California, worsening extreme weather means higher insurance rates are on the way.

How disasters affect can costs in other states

The rest of the nation also wants to know: Will my insurance premiums be increasing? According to Ruiz, the short answer is no.

“Homeowners and business owners in one state do not pay insurance premiums based on losses or catastrophes in other states,” she said.

Because each state has a department of insurance that regulates rates in that region, there are protections in place to prevent that from happening, Ruiz said.

And yet, even though insurance premiums are subject to extensive regulations at the state level, when insurers cannot adjust rates in highly regulated states, they do compensate by raising rates in less-regulated states — despite protections in place — leading to “a growing disconnect between insurance rates and risk,” according to a 2021 paper by economists at Harvard Business School, Columbia Business School and Federal Reserve Board. 

“Our findings call into question the sustainability of the current regulatory system, especially if natural disasters become more frequent or severe,” the authors wrote.

“Many insurance companies operate nationwide, or at least in multiple states,” said Holden Lewis, mortgage and real estate expert at NerdWallet.

“They are going to make up for their losses somewhere,” Lewis said.