Insuring Against Extreme Heat Navigating Risks in a Warming World 2025

The State of California is a useful case study in understanding the implications of increasingly frequent and severe climate perils on the attainability and affordability of insurance. A warmer and drier climate is compounding wildfire risk in California. Since the 1980s, wildfire season has extended by 27% globally,26 particularly increasing in the Amazon, Mediterranean and the western forests of North America – notably California. With new research showing that the world could reach 2.7ºC of warming by the end of this century, climate change is leading to larger and more frequent wildfires in much of the world.27 In 2024 alone, over 6,500 fires have burnt over 1 million acres of land in California. The insurance industry is struggling to respond to this heightened risk landscape. The 12 largest homeowners insurance providers in California account for 85% of the market. Of these 12:28 –Seven have limited new customers from acquiring homeowners insurance from their respective companies. –Six have announced intentions to discontinue portions of their existing policies. For example, one insurer has already executed 8,000 non-renewals for current customers. As a result, long-time customers who have relied on their insurers to protect their homes will no longer have access to the coverage they once depended on.29These companies cite growing exposure to catastrophic events, unprecedented increases in construction costs that exceed inflation, and a challenging regulatory environment that inhibits insurers from accurately pricing risk. The insurance industry’s recent losses in California’s wildfire market are telling – during the 2017-2018 fire season, insurers in the state lost the equivalent of two decades’ worth of profits.30 As a result, large parts of California are at risk of becoming “insurance deserts”, further worsening the state’s housing crisis by making it difficult for homeowners to secure mortgages. This, in turn, stalls new construction and threatens the long-term economic stability of high-risk communities. As climate damages increase and private insurance companies reduce coverage, homeowners are flocking to the government-run insurance programme known as the FAIR Plan, which provides basic property coverage to homeowners and businesses. The FAIR Plan, created to be California’s insurance plan “of last resort”, has increased to 3% of California’s market, equalling the state’s 10th largest insurer. The FAIR Plan’s growth does not appear to be sustainable. In the next three years, $5 trillion in coverage is projected to sit on the balance sheets of government-run insurance plans in California and Florida alone. This increases the likelihood that these schemes will require bailouts from Congress, leaving the American public on the hook. The Fair Plan also uses industry assessments to shift losses onto policyholders in private insurance markets, further driving up rates and impacting affordability.CASE STUDY 1 Wildfire risk is upending the insurance industry The fair plan faces increased exposure As of June 2024, the FAIR Plan's total exposure is $393 billion, reflecting a 38.3% increase since September 2023 (fiscal year-end) ($ billion). $400 $250$350 $150 $50$200 $100$300 $112.75$153.43$195.46$245.12$283.96$392.81 Sept 2019 Sept 2021 Sept 2022 Sept 2023 June 2024 Sept 2020$3.80 $4.72 $6.53 $9.84$13.45$20.68$108.95$148.72$188.93$235.28$270.51$372.14 $0 Source: California Fair Plan. (n.d.). Key Statistics & Data. https://www.cfpnet.com/key-statistics-data/. Insuring Against Extreme Heat: Navigating Risks in a Warming World 10