Who Bears the Risk When Insurers Won't

In May, California's Department of Insurance examined 114 State Farm wildfire claims files from the January 2025 fires and found 398 violations. Adjusters were reassigned so frequently that no single person owned a claim from start to finish. Records went missing. The department is seeking up to $4 million in penalties and a possible one-year suspension of State Farm's license to sell new policies in the state ^[1]. Ricardo Lara, the state insurance commissioner, described what investigators found.

Some troubling patterns that my staff will investigate include the frequent reassignment of multiple adjusters with little continuity in communication, inconsistent management of similar claims, and inadequate record-keeping or information-sharing among claims teams. — Ricardo Lara

President Trump has since ordered a federal probe into the company's wildfire payout conduct ^[2]. State Farm's response was blunt.

Our investigation found that State Farm delayed, underpaid, and buried policyholders in red tape at the worst moment of their lives. That is unacceptable, and we are taking decisive action to hold them accountable. — Ricardo Lara

But the finding captures something larger than one company's claims operation. It is the most visceral evidence yet that the private insurance model is failing climate-exposed regions not only by leaving — but by staying and malfunctioning. The withdrawal is now visible on three continents. In California, State Farm, Allstate, and Progressive have all pulled back from high-fire-risk areas, and the state's FAIR Plan — the insurer of last resort — has seen its policy count rise nearly 220% since September 2022, making it the de facto insurer for homeowners private carriers will no longer cover ^[3]. In Florida, national carriers have been retreating from the coast for years. In New Zealand, AA Insurance halted new policies across an entire postcode in Westport due to elevated flood exposure, with the country's Climate Change Minister acknowledging that adaptation would carry a significant fiscal cost spread across society ^[4]. In Europe, Allianz and Swiss Re are warning that parts of the continent are becoming uninsurable as wildfires burn through Spain, France, Greece, and the UK, and EU insurance regulators are urging Brussels to act ^[5]. What is filling the gap is not a single replacement but a layered architecture of new financial structures, each absorbing a different slice of the risk the private market has shed. The first layer is the capital markets. Catastrophe bond issuance tied to wildfire risk has surpassed $5 billion in 2026, within a broader market that now totals $61 billion ^[6]. These bonds allow insurers and reinsurers to transfer peak risks to institutional investors — pension funds, sovereign wealth funds, hedge funds — who collect a premium in exchange for bearing the loss if a predefined disaster threshold is crossed. Improved hazard data from firms like Verisk and Moody's has made the instruments easier to model and sell. The second layer is the expanding state backstop. California's FAIR Plan, with its 220% policy surge, is the most dramatic example, but the trajectory points further. The California Earthquake Authority has proposed a $25 billion state-chartered insurer of first resort to replace the FAIR Plan and assume catastrophic wildfire risk outright, with what it describes as the explicit goal of enabling private insurers to remain in the market ^[7]. The state would become the ultimate bearer of wildfire losses. The third layer, still taking shape, is the public disaster fund. The European Central Bank and EU insurance regulators are urging Brussels to create a bloc-wide natural disaster fund and an EU-level reinsurance scheme, a direct response to warnings from Allianz and Swiss Re that private coverage is becoming untenable in exposed regions ^[5]. The architecture is assembling with remarkable speed. But it carries a tension at its core, and the reinsurers themselves have named it.

additional risk-transfer capacity cannot replace measures that reduce the underlying risk to keep insurance affordable — Swiss Re

Swiss Re has made the same argument: risk-transfer capacity, however large, cannot substitute for physical risk reduction — hardening homes, clearing brush, restricting building in fire zones ^[5]. The new architecture is, by design, a mechanism for redistributing losses. It does nothing to reduce the losses themselves. And it is already transmitting climate risk into the broader economy in ways the old insurance model contained. An NBER study by Wharton's Benjamin Keys found that a reinsurance shock — global reinsurers nearly doubling rates to account for disaster risk — has caused homes in the most exposed U.S. ZIP codes to sell for an average of $43,900 less ^[8]. In Orleans Parish, Louisiana, insurance costs now consume nearly 30% of monthly housing payments ^[8]. Keys described the mechanism plainly.

We don’t want a situation where the insurance market is effectively decimating the real estate market. — Sean Conway

Jerome Powell has drawn the line forward ^[9].

in 10 or 15 years there are going to be regions of the country where you cannot get a mortgage [because insurance isn’t available] — Jerome Powell

A house without insurance is a house without a loan. The migration of climate risk out of the insurance system is, in that light, also a migration into the housing market, the banking system, and the broader economy. California crystallizes the structural contradiction at the heart of this transition. The state is simultaneously courting capital markets to absorb wildfire risk and legislating against the forms that capital takes when it arrives. On one side, California's 2025 catastrophic modeling plan allows insurers to use forward-looking risk factors and reinsurance costs to justify rate increases, provided they maintain 85% of their market share in at-risk areas — a deal that trades rate flexibility for a commitment to stay ^[10]. The plan is cat-bond-friendly by design: the more data-rich and forward-looking the modeling, the easier it is to structure and sell catastrophe bonds to institutional investors. On the other side, Governor Newsom signed legislation blocking hedge funds from purchasing wildfire insurance subrogation claims — the legal right to pursue recoveries from liable parties — after firms like Baupost Group generated $1 billion in profits from claims against PG&E following previous fires ^[11]. The California Earthquake Authority was explicit about what it saw.

opportunistic, profit-driven investment speculation — California Earthquake Authority

Legal experts warned the restrictions could reduce market liquidity for insurers precisely when the state is trying to attract capital. The contradiction is not hypocrisy. It is the logical consequence of a state trying to solve an insurance crisis with financial engineering while remaining politically accountable to voters who see hedge funds profiting from burned-down homes. California wants capital's capacity to absorb risk but not capital's instinct to speculate on it. The two cannot be cleanly separated. The picture is not uniform. Florida enacted tort reforms in late 2025 that banned assignment of benefits for roof and auto glass claims, and premiums subsequently declined as new carriers entered the market ^[12]. That suggests a meaningful portion of the insurance crisis in some states stems from legal and regulatory dysfunction rather than climate exposure alone. And Swiss Re assesses that wildfire risk, while the fastest-growing weather peril globally, remains small compared to established peak risks like typhoons and European winter storms ^[6]. The $5 billion in wildfire catastrophe bonds reflects investor appetite and a growth trajectory, not a market that has already reached the scale of hurricane risk. But these complications refine the thesis rather than overturn it. Florida's tort reforms cut premiums by removing a legal distortion; they did nothing to address the underlying question of whether coastal properties will be insurable against hurricanes in two decades. And the fact that wildfire risk is small relative to peak perils is precisely what makes its growth rate alarming — the market is building the architecture for a risk class that is expanding faster than any other. The question is no longer whether climate risk is insurable. It is which financial structure will bear it when private insurers will not. The new architecture — catastrophe bonds, state funds, public backstops — is assembling because the old one is failing. But it is an architecture for distributing losses, not preventing them. The fire still burns. The bill still arrives. Only the name on the check has changed.