The Los Angeles fires will be extraordinarily expensive

The firesFAIR FAIR that are may be shocking, but they are not surprising. Anyone who lived in the Hollywood Hills was . And for anyone who forgot, their annual insurance renewal provided a reminder at considerable expense. Such moments occasionally dampened the mood in the City of Angels. Now the promised catastrophe has arrived.On the morning of January 10th firefighters were continuing to battle the flames, which have so far displaced 180,000 people and led to ten deaths, as fierce winds threatened to spread the embers farther still. Even at what could still be a relatively early stage, the wildfires are likely to be among the most expensive ever. Homes in Pacific Palisades, a neighbourhood still ablaze, sell for around $4m. Many Hollywood actors have already lost their residences. Farther north, the Eaton Fire is menacing less affluent suburbs. JPMorgan Chase, a bank, suggests that the economic damage could amount to more than $50bn, of which $20bn will be insured.The fires will expose failures in California’s creaking insurance market. Companies have retreated from providing home insurance in the state. In 2022 Allstate, then California’s fourth-largest home and casualty insurer, stopped selling policies. In March State Farm, another insurer, cancelled 30,000 home-insurance policies, including 1,600 in Pacific Palisades. The firm highlighted the rising risk of losses from wildfires as a reason for pulling out of the market.Expensive insurance is one thing; fleeing insurers is quite another. Their decision to leave can only be explained by measures that prevent the market from working properly. Until recently, Californian companies had been forbidden from using model-based estimates of catastrophic risks, owing to a ballot measure that was passed in 1988 and sought to lower premiums. Therefore, although climate change increased the likelihood of wildfires, insurers were unable to reflect this in their bills. Many refused to bear the risk.As a consequence, lots of Californians have ended up reliant on the plan, a non-profit outfit that acts as an insurer of last resort and charges accordingly. The plan is exposed to $3bn of potential claims in Pacific Palisades, a number that grew by 85% from 2023 to 2024 as private insurers retreated from the market. Some millionaires will end up out of pocket: the plan covers up to only $3m of losses. Many others will be uninsured.Even Californians who have avoided the worst of the fire could lose out. If the plan is unable to meet the cost of claims from its own reserves, it will almost certainly recoup them from the private insurers still operating in the state. By chance, on January 2nd reforms to allow insurers to use model-based estimates of risk went into effect. The next wildfire season will not come as a surprise. At least, with better pricing of the risk, Los Angeles might be more prepared.