Regulatory landscape & reinsurance costs a challenge post LA wildfires: Morningstar DBRS

California’s strict regulatory environment, coupled with high reinsurance costs, has intensified challenges for insurers in the aftermath of the January 2025 wildfires, according to Morningstar DBRS.

The wildfires, which burned over 16,000 structures across some of Southern California’s wealthiest communities, became the costliest wildfire event in U.S. history, as reported by the California Department of Forestry and Fire Protection.

Morningstar DBRS noted that reinsurance costs have remained elevated since 2023. In response, reinsurance attachment points have increased, which results in primary insurers retaining more risk and increasing their exposure to natural catastrophes.

Additionally, insurers may face costs beyond their attachment points and reinsurance limits, including reinstatement premiums, depending on the specific structure and coverage of their reinsurance programs.

The high reinsurance costs have forced many insurers to reconsider their insurance offering in the high-risk areas of California, leading to several major insurers stopping new coverage in the recent past.

To address these challenges, California reformed its insurance regulations in December 2024, enabling insurers to pass on reinsurance costs to customers for the first time.

Some large insurers have responded by resuming underwriting policies, while others remain cautious and have taken a wait-and-see approach.

Morningstar DBRS said, “In our opinion, this regulation reform is a step in the right direction, but it may not be sufficient to resolve the insurance crisis in the California market. Passing high reinsurance costs on to customers could trigger affordability challenges, potentially causing further price interventions from advocacy groups, especially after the recent devastating losses.”

The Insurance Rate Reduction and Reform Act of 1988 places restrictions on premium rate increases, requiring public hearings or settlement for hikes over 7%. This process often leads to delays in implementing necessary rate adjustments. While the reform allowing insurers to pass reinsurance costs to customers is seen as a positive move, the slow regulatory process and the ongoing affordability concerns continue to pose significant challenges for California’s insurance market.

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