The wildfires in Los Angeles this January marked a significant moment for the insurance industry, highlighting that wildfires are now a year-round threat, not just a seasonal issue confined to rural areas. A recent report from ZestyAI warns that the wildfire risk will remain high across several states in 2025, especially in California, where drought conditions are developing.
The devastating fires in Los Angeles resulted in the loss of 29 lives and caused extensive damage to homes and properties. Insurers in California, including State Farm, are feeling the impact. They are requesting approval for substantial rate increases from the California Department of Insurance. So far, there have been nearly 38,000 claims filed, with payouts exceeding $12 billion.
The wildfire threat is not limited to California. The report notes that states like New Mexico have also faced destructive fires, and the Midwest and Southeast are experiencing similar dangers. The 2024 wildfire season showed that wildfires are spreading to new areas and behaving unpredictably, which poses challenges for insurance companies that rely on outdated models for risk assessment.
Looking ahead, the rest of 2025 is expected to bring more volatility. A moderate wildfire season in 2024 has given way to concerns about severe drought returning, particularly in the Southwest and Northern Rockies. Heavy rains in the past two years have led to increased vegetation growth in states like California, Oregon, and Washington. If summer heat and dryness persist, these areas could become highly combustible, creating a dangerous cycle where wet years lead to more fuel for fires.
Drought conditions are already affecting states such as Arizona, New Mexico, Nevada, Utah, and Colorado. New high-risk areas are emerging in Montana, Wyoming, and the Dakotas due to a dry winter and warm spring. Reports of drought are also coming from Texas and Florida.
In response to these challenges, new regulations are changing how insurers assess and communicate wildfire risks. California has implemented a Sustainable Insurance Strategy that allows insurers to use forward-looking models for pricing wildfire risk. Colorado has introduced a law requiring insurers to be transparent about how wildfire models affect rates and to inform policyholders about their risk scores. Washington has also enacted rules to ensure that policyholders are notified of any premium increases and can request explanations for those increases. Meanwhile, Oregon has repealed a controversial wildfire hazard map after public pushback.
As we move through 2025, the insurance industry is adapting to a new reality where wildfires pose a constant threat, requiring innovative approaches to risk assessment and management.