The California state government, led by Governor Gavin Newsom, signed a package of bipartisan bills on February 9th aimed at stabilizing the state’s insurance market, a move prompted by escalating challenges in insuring properties against climate-related disasters. The legislation expands the reach of the state-backed insurance program, addressing a growing “insurance cliff” where homeowners in high-risk areas are finding coverage unaffordable or unavailable.
The crisis stems from a dramatic increase in natural disaster losses. According to a report released by the Insurance Research Institute on January 25th, global damage from natural catastrophes reached $417 billion in 2024. This surge is forcing insurers to reassess their risk exposure and, in some cases, withdraw from markets particularly vulnerable to wildfires, floods and other extreme weather events. The trend is not limited to California; Australia has seen a similar spike, with insurance claims related to extreme weather events increasing to an average of $4.5 billion annually in the 2020s, nearly triple the figure from the 1990s, according to the Insurance Council of Australia.
The “insurance cliff” refers to the shrinking capacity of insurers to absorb risk, leading to higher premiums and stricter underwriting standards. This disproportionately affects homeowners in areas prone to natural disasters, effectively pricing them out of the insurance market. The situation is exacerbated by the accelerating pace of climate change, which is increasing the frequency and intensity of these events. As Seth Westra, a climate risk scholar at the University of Adelaide, noted, “The potential for continued increases in insurance claims and losses is high as global warming accelerates, and the impacts of fires, floods, coastal inundation, and tropical cyclones turn into more severe.”
The California legislation seeks to address this by bolstering the state’s FAIR Plan, a program designed to provide basic property insurance to those unable to obtain coverage through traditional channels. The reforms include expanding the FAIR Plan’s coverage limits and streamlining the claims process. However, the long-term sustainability of such programs remains a concern, as they rely on taxpayer support and may not be able to fully compensate policyholders for catastrophic losses.
The global insurance industry is responding to the crisis with a mix of adaptation and innovation. Companies like Allianz are expanding their coverage for risks related to agriculture, forestry, and weather-related natural disasters. Swiss Re is offering advisory and support services to local governments to enhance climate resilience. However, the fundamental challenge remains: how to accurately assess and price the escalating risks associated with a changing climate.
The Insurance Research Institute’s report highlights the growing require for public-private partnerships to address the challenges posed by climate change. The report emphasizes the importance of proactive risk management strategies, including investments in infrastructure, land-use planning, and early warning systems. The situation is further complicated by the potential for insurance company failures, as highlighted in a recent report by the Financial Times, raising concerns about systemic risk within the financial system.
As of February 21st, no further legislative action is scheduled regarding the California insurance market, and the long-term effectiveness of the newly signed bills remains to be seen. The California Department of Insurance has not released a statement detailing the projected impact of the legislation on premium costs or coverage availability.
