The financial costs of the California wildfires
Insights from our policy and finance expert
By Nidhi Upadhyaya Wed, Aug 27, 2025
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The Climate Resilience Center’s experts and fellows explore specific natural disasters across the world. These analyses move beyond breaking news: our experts take a deeper look into how cities respond to disasters and what opportunities emerge for future efforts. They assess the trends and solutions that shape the future of climate resilience. And they share exclusive findings and recommendations for strategists and policymakers around the world on how communities can better prepare for and respond to the climate crisis and its intensifying impacts.
Main page | The aftermath of the California wildfires | Technology in the fight against wildfires
Historically, wildfires strike the United States beginning in the early summer months. However, this year has already been different. And the costs are devastating.
The economic losses of the unseasonal Los Angeles fires are estimated to cost between $164 and $250 billion. This accounts for deaths, property losses, decreases in livelihoods, and the reduction of local economic activity. Six months later, the government of California is still working to expedite the recovery. The state has committed $101 million in new funding to rebuild low-income housing near wildfire burn areas alone. But it’s not just the public sector that bears this burden. Early reports estimate that German reinsurers needed to cover an estimated $1.9 billion in losses.
There is a clear need to align priorities as the impacts and costs of climate change do not discriminate. Natural disasters like wildfires are exacerbated by climate change. They are now clearly affecting our physical, social, and financial systems, forcing us to think about how we can prepare for a hotter future.
The insurability question and wildfires
Extreme weather events and climate-related disasters have caused significant economic losses. In the decade before 2019, they cost nearly $1.5 trillion. Financial ecosystems around the world are rapidly evolving to deal with this economic burden. This is especially true for the insurance industry. In the first half of 2025, global insured losses from natural catastrophes reached $80 billion, driven by wildfires in California and severe thunderstorms in the United States. However, the Los Angeles wildfires are not unique. The same year brought staggering heat to Europe and the Middle East, which exacerbated wildfires. In March 2025, South Korea had to evacuate thousands due to one of its worst wildfires on record.
This underscores how the insurance industry has faced a steady rise in weather-related losses in recent years, prompting tighter underwriting, higher premiums and renewed scrutiny of risk models.
This underscores how the insurance industry has faced a steady rise in weather-related losses in recent years. In turn, this has prompted tighter underwriting, higher premiums, and renewed scrutiny of risk models. However, this can leave many vulnerable. To more equitably deal with this shift and its impact on risk management, the insurance sector will need to coordinate more closely with governments to ensure strategic investments in the short, medium, and long terms.
How did the city respond?
The year before the January wildfires took away homes, insurance companies had already made significant shifts. In Los Angeles, many companies decided to reject coverage for new applicants; to not renew policies; or to increase premiums. In July 2024, 1,600 policies for homeowners were dropped in the Pacific Palisades.
An S&P Global Market analysis reveals that the median average annual two-year claim severity filed by California’s largest home insurers went up 19.7 percent. The median average annual five-year increase jumped to 11.6 percent. Essentially, the cost of claims borne by insurers increased over the last few years. This makes it harder for insurance companies to justify these risks from a traditional business perspective. Behind these increasing costs are a number of causes, including inflation. In addition, there have been recent impacts to the labor market, which consequently can increase wages or cause costly delays.
What role can the insurance industry play?
The insurance sector plays a key role in risk management, evaluating future risks to correctly price and pay out during times of disasters. Insurers have the experience and tools needed to support long-term financial planning.
To deal with increasingly frequent climate hazards and related risk management for climate vulnerable communities, the insurance sector will need to coordinate more closely with governments to ensure strategic investments in the short, medium, and long terms.
While insurance alone cannot address the holistic challenges of a changing climate, it can support and even define private sector adaptation priorities. From financially protecting losses of frontline communities to driving the very conversation on how to value climate losses and risks, insurance plays a vital role at every stage.
The lessons from Los Angeles
As other cities deal with the devastating aftermath of wildfires, the story of Los Angeles’s unseasonable fires provides clear lessons. Insurability must go beyond an examination of policies; it must also create an environment that reward risk reduction. From fire-resistant building materials to defensible space requirements and underground power lines, resilient infrastructure can enable rapid recovery and long-term sustainability. For cities, this will mean enforcing standards for new builds and exploring opportunities to retrofit existing buildings.
However, in the city, current zoning, land-use, and permitting policies often fail to reflect the wildfire realities of today. Current policies—like building in high-risk areas or limited requirements on fire-resistant materials —do not account for the rapid frequency and intensity of wildfires.
While these changing standards are critical to prevent losses, reducing risk alone is not enough. Insurance companies must also be prepared to wait for the long-term gains that can come from patient capital. But this patience must be incentivized. Regulatory policy changes must promote insurance availability and affordability in high-risk areas. For example, insurers could be required to recognize and reward property-level mitigation efforts with premium incentives. To ensure long-term financial protection, climate risk must also be integrated into insurance regulation, fiscal planning, and investment strategies at all levels of government.
As insurance markets rethink their involvement in high-risk zones, maintaining insurability is a systemic challenge. Governments, insurers, and communities need to work together to reduce these risks through investments and data transparency. With the risk of wildfires and natural catastrophes increasing exponentially, this is a critical time to evaluate the role of the insurance industry in managing future risks not just for physical assets and communities, but also for the security of our financial systems.
