Following last year’s wildfire losses, California policymakers are searching for structural fixes. One idea is to create a state-backed wildfire insurance fund, often justified by reference to New Zealand’s natural-hazard insurance system. Such a proposal would let insurance companies sell property coverage, but carve out wildfire losses and put them in a state-run insurance pool. Californians would buy wildfire insurance coverage from this California fund.
Considering the viability of a California wildfire insurance plan, I am reminded of Rudyard Kipling’s interview with Mark Twain. Twain told Kipling he liked reading mathematics books. “I didn’t understand a word of it: but facts, or what a man believes to be facts, are always delightful,” Twain said. “Get your facts first, and then you can distort ’em as much as you please.”
Californians have paid hundreds of billions of dollars in premiums over the decades, which have allowed California insurance companies to slowly and methodically build up their surplus and reserves. This lets them pay out not only on every day, normal losses (a kitchen fire or a fallen tree branch breaking windows) but also for catastrophic events like large scale wildfires. A state-run wildfire fund could let the insurers walk away holding the decades’ worth of surplus and reserves taken from policyholders, while dumping future long-tail liability.
We need to learn the lessons from the failure of California’s state-run earthquake insurance experiment. The California Earthquake Authority was created to stabilize the market, yet decades later it offers expensive, thin coverage that has not meaningfully improved affordability or availability for most homeowners.
Following the 1994 Northridge earthquake, State Farm and other large insurance companies withdrew from the home insurance market, claiming they needed a bailout. Republican Insurance Commissioner Chuck Quackenbush, who was all too eager to please insurance companies that had given him $6.4 million for his re-election, led the charge to de-link earthquake from home insurance and created the California Earthquake Authority (CEA) in 1996.
California hasn’t had a major earthquake since 1994, so state-run earthquake insurance should be a huge success. The problem is the CEA spends so much of our premium dollars on expensive reinsurance costs, the earthquake policy is still a high-deductible, low benefit policy that isn’t worth the price to many Californians. In effect, the CEA functions as a pass-through from California homeowners to the global reinsurance market, with little affordable risk protection—and severely constrained ability to build an additional surplus layer—remaining once that transfer is made.
The CEA may have had to hedge against the “Big One” with big spending on reinsurance. But if earthquake coverage had remained as part of the home insurance policy, the companies would have built up even more reserves since 1994 to cover the risk. Just as no one can predict the “Big One,” no one could have predicted there wouldn’t be a major earthquake in the last 30 years. However, the CEA’s inability to adequately capitalize against an earthquake through the development of surplus and reserves, and reliance on high-cost reinsurance, shows the pitfall of a state-run disaster insurance policy.
The problem grows exponentially when capitalizing a wildfire fund. Despite our best mitigation efforts, major wildfires with tens of billions of dollars in insurance consequences hit in 2017 – 2018 and again in 2025. Relative to earthquake forecasts, these losses are sadly more predictable with advancing climate change. Capitalizing the costs of these payouts is beyond the capacity of California – tens of billions of dollars anyway you count it, likely high tens of billions.
Premiums from California policyholders over the decades have built up hundreds of billions of dollars in surplus and reserves for California insurance companies. Policyholder surplus for the top five homeowner insurers in California alone was about $170 billion at year-end 2024 (counting State Farm’s parent company.) The state has no realistic capacity to capitalize at this level. In recent years, insurance companies have used this leverage to bully the state into higher premiums and other deregulation measures. However, strong insurance commissioners, like John Garamendi, realized the power they had over insurers with rate freezes and other sticks to force companies to compete fairly in the market and not cherry pick risks. So long as insurance companies want our money for less predictable events they should be on the hook for wildfires. Despite their claims of poverty, insurance companies have made more money in California than they do in other states. California is the second largest insurance market in the nation and the fourth largest in the world. If companies want to keep doing business here, they need to play fair and the insurance commissioner has the power to make sure they do.
Top home insurers in California split premiums out by peril. Based on this data, we can estimate the wildfire portion of total CA home insurance premiums at around 30%. With $13.8 billion in California home insurance premiums in 2024, that suggests more than $4 billion was charged to consumers for wildfire coverage. This doesn’t take into account the hundreds of millions in surplus and reserves built up to back stop against a major fire.
Unless the insurance companies are willingly going to turn over the tens of billions of dollars in reserves and surplus they have built up to the California public, there is no realistic way to capitalize a state-run, natural hazard protection plan. Even if they did, the plan, like the CEA, would still likely have to heavily rely on expensive reinsurance.
Pointing to a New Zealand plan suggests there is a viable model. However, New Zealand’s program only covers $300,000 NZ in damage, which translates to $176,685 in US dollars. The average home value in California is $755,000. New Zealand’s limited cap reflects deliberate design: the New Zealand fund applies across multiple natural hazards and is intended as a thin first-loss layer, appropriate for events—such as many earthquakes—that often cause partial damage rather than total loss. Wildfires are different. As recent California fires have shown, wildfire losses frequently result in near-total or total destruction of homes, making a thin, capped layer far less effective as a meaningful source of consumer protection.
A better bet is looking to the federal government for a federal reinsurance program that will make the cost of reinsurance lower for insurance companies because the government would not need to make a profit on the transaction. The problem with private reinsurance costs is that reinsurers make so much money on each transaction because they are basically taking on a bet, and it’s an unregulated industry. The government does not need to make money on any reinsurance transaction and, since it prints its own money, a bad bet won’t break it.
Senator Adam Schiff has a proposal to a create a national reinsurance fund. Senator Schiff’s proposal would establish a federal catastrophe reinsurance facility designed to provide excess-of-loss protection for insurers facing extreme natural-disaster events. By offering a public reinsurance layer at the federal level, the proposal seeks to lower overall reinsurance costs and support the continued availability of property insurance in high-risk regions. Although there is some bipartisan interest in the proposal, it has not yet advanced, leaving open the question of when—and under what circumstances—the federal government will step in to address systemic catastrophe risk.
A state reinsurance plan under the same idea of delivering lower cost reinsurance costs for insurers is possible as well. The cost of capitalizing a California reinsurance plan can be prohibitive, but the state has the capacity to issue catastrophe bonds that could issue on a trigger if the reinsurance plan would ever need to pay out. The question of whether California would want to make that gamble is an open one, but it is a more viable and preferable option to make home insurance available and affordable. Access to the state reinsurance pool could be contingent on the insurance company offering home insurance coverage to people in high-risk areas who mitigate against fire risk and selling an all-perils policy, including earthquake and floor coverage.
In a recent poll, 92% of Californians say the high cost and availability of insurance is their top issue. The easiest way to address that concern is a requirement that insurance companies need to sell home insurance to everyone who take the steps to fire-proof their home up to state wildfire mitigation standards. The reform should be paired with a robust mitigation grant funding program that allows lower income homeowners to mitigate against fire risk. It’s a far better way to spend greenhouse gas funds than on a speed train that will never be finished. The mandatory insurance proposal has the support of 86% of voters. The industry hates the idea, but sugar coating it with cheaper, government-backed reinsurance might help sell such a plan.
To date, insurance companies are not on board with government-backed reinsurance. That may be a prerequisite to California taking the leap on a state-based reinsurance plan.
Proponents of a state-run wildfire fund claim that leaving Californians open to the whims of insurance companies who will threaten to leave the market after every wildfire as leverage for higher rates is bad policy. They are right, but there is a better way than to allow insurance companies to walk away from wildfire risk. Force insurance companies to sell coverage to all policyholders who meet state wildfire mitigation standards with the stick of being forced from the home and auto insurance market if they don’t and the carrot of a government-backed reinsurance plan if they do.
