Resilience through reinsurance in wildfire recovery

The January 2025 California wildfires resulted in the tragic loss of 28 lives, destroyed more than 18,000 structures and caused economic damages of about $52 billion, some 70% or more of which are likely to be insured. 

Though wildfire is often described as a ‘secondary peril,’ these devastating fires emphasized both the increasing severity of this risk and the need to better understand it to protect people and property.

(Re)insurance injects billions of dollars of non-recourse funding, in a structured way, to help facilitate a reformative recovery from events like the 2025 Palisades and Eaton fires. Non-recourse is important to highlight. Even interest-free loans must be repaid, and homeowners or businesses are still exposed to  future losses, additionally loans are not always guaranteed or immediate after a claim. In contrast, insurance does not need to be paid back, covers the immediate and future claims and offers certainty. (Re)insurance gets families and businesses back on their feet quickly and ideally in a more resilient state to face any future losses but – (re)insurers need a viable market and data and insight about how the hazard, exposure and risk mitigation is changing or adapting.

The Cambridge Centre for Risk Studies (CCRS) recently published a report, Wildfire: A Spreading Risk, supported by AXA XL, which explores the rising impact of wildfires in California and aims to increase understanding of the evolving nature of this risk and how recovery can be optimised.

Changing hazard and exposure

Wildfire hazard is changing at a rapid pace, driven by several factors. The last ten years have been the hottest on record since the Industrial Revolution of 1850. That heat dries out vegetation, creating fuel for fires to ignite and spread.

In addition, changing rainfall patterns have been observed. For example, periods of heavy rainfall, create conditions that encourage excess vegetation growth and then extreme drought dries that vegetation out. 

The wildfire season is now lengthier than it has ever been.  The Palisades and Eaton fires took place outside of the period traditionally considered to be wildfire season. In addition, there has been an uptick in the number of ‘fire weather’ days – occasions on which meteorological conditions such as high temperature, low relative humidity and strong winds combine to create conditions conducive to wildfires starting and spreading.

While wildfire is still considered a secondary peril by much of the (re)insurance industry, it is clear that it has the potential to be as damaging as a major earthquake or hurricane. Insurance catastrophe models, can however, underestimate the potential impact of wildfires by a sizeable amount. Since the 2016 Fort McMurray fire – the largest and most destructive in Canadian history – wildfire has attached to, and exhausted, multiple nationwide reinsurance programs and exceeded the vertical limits purchased by certain regional insurance carriers. Relying on understated modelled exposure can lead to inadequate limits being purchased, creating uncertainty at the very worst time.

In addition to changes in the hazard, exposures are increasing too, with the spread of urbanization meaning more properties are built in higher-risk zones. CCRS estimates that the Wildland Urban Interface (WUI) accounts for about 10% of land in the United States, but almost 40% of the houses are built on it – including one in three houses in California. CCRS notes that any housing expansion in Los Angeles and San Diego, for example, can only logically take place by building in high-risk zones, creating potential planning and (re)insurance difficulties in the future.  

Building resilience

Although both the hazard and exposure to wildfire are increasing in California, there are some mitigating factors that reduce the threat of risk to life and property damage.
California has some of the most stringent building codes in the world, according to CCRS’ report, offering a meaningful mitigation to the wildfire risk.

Section 7A of the California Building Code enacted in 2008 contains requirements for building materials and constriction methods that protect new structures from wildfire exposure. It mandates the use of specific non-ignition materials for elements like windows, roofs, walls and decking. 

The CCRS report examined data from the Federal Emergency Management Agency (FEMA) which showed that houses built to code were almost three times as likely to survive a fire than those which were not. It also demonstrated that future savings on those structures that comply with the codes would likely amount to approximately $24 billion in savings over 75 years for residential property, or $325 million annually.

Insurance and reinsurance challenge

Insurance penetration in California is notably high facilitating recovery but given the high level of loss activity post 2017 and a challenging regulatory environment there has been a retraction or withdrawal by some insurance carriers from underwriting certain business – even before the devastating 2025 fires.

To mitigate the reduced private market capacity there has been a rapid increase in the size of California’s insurer of last resort, the Fair Access to Insurance Requirements (FAIR) Plan, which has grown by 52% since September 2024 (according to the latest FAIR Plan figures) to almost $700bn and by 317% since September 2021. The FAIR Plan has requested $1 billion funding from the insurance industry this year, the first such request in 30 years.

There has also been a notable increase in the Excess & Surplus (E&S) lines market for residential risk in California. This risk is typically written on an admitted basis and the rise in E&S coverage is somewhat symptomatic of the challenge facing the insurance market for wildfire risk in California. 

With models lagging the magnitude of the potential risk, insurance pricing has often been challenging; potentially making it unsustainable for many insurers to continue to underwrite wildfire risk in the State. This, in turn, creates issues for reinsurers to offer suitably priced programs.

Recovering better

Reinsurance is a vital tool to help communities recover quickly from devastating events like the 2025 California wildfires. It offers the opportunity for reformative recovery – providing funding for building back better than before, and it supports communities financially very quickly after a loss occurs, to enable people to get back on their feet more rapidly. That said, it can only do so if the risks are understood, priced and underwritten. 

The changing hazard, coupled with increased exposure in hazardous areas, is likely to manifest in increased wildfire losses for the foreseeable future. There is some cause for optimism with the increased resilience that comes from more stringent building codes. But the lack of understanding of the peril coupled with an insurance market that impedes capacity growth from the traditional market, suggests that this will continue to be a challenge.

We hope that the Wildfire: A Spreading Risk report will help to foster and develop greater understanding of wildfire – in California and beyond – and enable the (re)insurance market to respond to the future challenges of this evolving risk.