Los Angeles: Wildfires deliver a catastrophic start to 2025

For the citizens of California, living with the threat and impact of wildfires has become very familiar.

A combination of wildfire-inducing factors in California – dry conditions, the presence of vegetation as fuel, and the fierce Santa Ana winds blowing dry air from the interior to the coast, is familiar. But instead of wildfires burning far away in the hills, the location of this current collection of significant wildfires is in and around Greater Los Angeles, home to more than 18.3 million people.

This event is a tragic catastrophe. Already the most destructive wildfire event in Los Angeles County (pop. ~9.66 million) history, certainly now in the top three deadliest fires in the state, and potentially the costliest in U.S. history, it is hard to keep up with the latest extent of the destruction from now six separate wildfires at various locations predominantly to the west and north of the city, as well as areas inside the city.

As of writing this article, according to media reports ten people have been killed, around 9,000 to 10,000 structures destroyed, nearly 150,000 residents are under mandatory evacuation orders, and some 200,000 are under evacuation warnings. Over 5,000 firefighters are looking to contain the fires – with the two largest fires largely uncontained.

With this event on course to become one of the most destructive wildfires in history concerning property losses, reinsurance markets will be watching closely to assess whether losses extend beyond primary retentions and into reinsurance layers – with some companies already reporting they expect this to happen. Insurance-linked Securities (ILS) funds are also likely to monitor the situation closely, with several cat bonds exposed to wildfire, including aggregate, multi-peril deals.
 

Palisades Fire

The first wildfire to be reported a little over three days ago early on January 7, was the Palisades Fire, which started in the hills to the north of Pacific Palisades (pop. ~23,000), an affluent residential neighborhood nestled between the Santa Monica Mountains and the Pacific Coast, just two miles or so up the coast from Santa Monica.

The area is home to the Getty Villa collection of 44,000 Greek, Roman, and Etruscan antiquities dating from 6,500 BC to 400 AD, and also some of the most exclusive beachside properties in the U.S. including iconic Malibu Beach. According to Zillow, the average home value in Pacific Palisades is approximately US$3.5 million – one of the top 25 most expensive ZIP Codes in the U.S.

According to CAL FIRE reports, the Palisades Fire grew rapidly on January 8 around noon local time, adding thousands of acres to the burn footprint in a few hours, which at the time of publishing now stands at around 20,500 acres. The Palisades Fire has already destroyed a preliminary total of over 5,300 structures, earning the title of the most destructive in Los Angeles County's history on its own, with two people reported killed. Two elementary schools serving more than 700 students have been destroyed.

Los Angeles International Airport (LAX), around 15 miles southeast of the Palisades Fire, saw around 15 percent of flights delayed on January 8 but with no significant cancellations, and the airport is open and operating normally.
 

Eaton Fire

Later on January 7, the Eaton Fire ignited in the Angeles National Forest on the outskirts of Altadena and Pasadena, some 10 miles northwest of Los Angeles city. Like the Palisades Fire, the Eaton Fire grew quickly around noon on January 8 and currently threatens approximately 13,000 buildings after expanding to nearly 14,000 acres. Firefighters have slowed down its expansion.

Reports state that as many as 5,000 structures in the Altadena area have already been destroyed, and according to media reports, three people have been confirmed killed as a result of the Eaton Fire.

Figure 1: Map from CAL FIRE showing locations and sizes of the wildfires as of 1 p.m. PT, January 10, 2025.
 

Other smaller fires are scattered to the north and west of the city, the largest of which is the Hurst Fire (~1,000 acres) close to Sylmar and San Fernando on the western edge of the Angeles National Forest.

The Sunset Fire was reported at 6 p.m. on January 8 and impacted the world-famous Hollywood Hills. Evacuation orders were in place for Mulholland Drive and Hollywood Boulevard, a few blocks from Sunset Boulevard. Firefighters contained the fire at 43 acres.

At 3.34 p.m. local time on Thursday, January 9, the Kenneth Fire started on the eastern edge of the Upper Las Virgenes Canyon Open Space Preserve near West Hills, on the western outskirts of Los Angeles County and the Ventura County border. It quickly consumed nearly 800 acres within two hours of being reported and has now burnt 1,000 acres and is 35 percent contained.

With an immediate threat to life in areas impacted especially by the Palisades and Eaton Fires, mandatory Evacuation Orders are in place, together with many Evacuation Warnings.  
 

Impact on utilities

Beyond the already significant damage to residential and commercial properties, the fires are taking a toll on critical infrastructure and inflicting severe losses on communities, highlighting the widespread devastation beyond just personal property. Schools, essential services, and facilities, including power lines, transportation networks, and communication systems, face disruptions.

Some 19,000 customers are without power in Ventura County, and 96,000 customers in Los Angeles County, but power workers have significantly improved the situation in the last 24 hours.

As flames encroached, panic led to abandoned vehicles in gridlocked traffic and significant damage to cars parked at properties, with the relentless flames consuming structures and vehicles alike.

Firefighters fighting the Palisades Fire were hindered by a lack of water in fire hydrants, as hydrant tanks drained, and water pressure to the hydrants fell, a situation that has now been remedied. With a smoke wall stretching from the Santa Monica Mountains to the Pacific Ocean, smoke is also a driver for implementing evacuation orders, as air quality plummets to unhealthy or hazardous. This is in addition to ‘boil orders’ or instructions to use bottled water, issued by water companies as fallen ash contaminates reservoirs and water storage facilities.
 

Risk of urban conflagration

These wildfires exemplify the complex dynamics of wildfire risk at the wildland-urban interface (WUI), as all around the Los Angeles Metropolitan region human habitation rubs alongside hills, mountains, and forests - natural, often fire-prone landscapes.

Add in this combination of strong Santa Ana winds reaching speeds up to 80 miles per hour, gusts up to 100 miles per hour, critically low humidity, and persistent drought conditions in the region, and wildfires in Southern California such as the Palisades Fire vividly illustrate the escalating challenges of wildfire management in such vulnerable zones, and underscores the urgent need for comprehensive wildfire risk strategies.

All of Los Angeles County is classified as in moderate or severe drought, and since October 2024 rainfall in Los Angeles has totaled just 0.16 inches. Even the major California rainfall/flooding events in early 2023 contributed to these fires, as they generated new vegetation which is now fuel.

There are now tragically many examples of urban conflagration in the Palisades and Altadena areas due to these fires, where all structures within a neighborhood are destroyed, potentially ignited by wind-driven embers raining down on properties.

The risk of significant urban conflagration remains high in densely populated areas within Los Angeles and Ventura Counties, particularly those intersecting with the wildland-urban interface. The rapid spread of the fires, exacerbated by strong winds, highlights the vulnerabilities inherent in urban configurations where residential and commercial structures are closely knit. Such environments can potentially accelerate the spread of fire, challenging containment efforts and endangering more structures and lives.
 

Pressure on the FAIR Plan

For insurers, the series of significant wildfire events in California over the past five years, combined with regulatory constraints that prevent the incorporation of wildfire loss costs based on catastrophe models into rate-making, have led to a position of heightened caution.

As private insurers have withdrawn, the state-backed California FAIR Plan has grown, and as of September 30, 2024, the exposure in Los Angeles County was US$112.2 billion with a year-over-year growth of 53 percent. Los Angeles County exposure represents approximately 23.1 percent of the entire California FAIR plan portfolio. 

The City of Pacific Palisades is considered in the top five in terms of exposure concentration in Southern California with US$5.9 billion in exposure (around a seven-mile radius where risk is concentrated).

The Pacific Palisades represents a typical example of the state of wildfire insurance coverage, and why there is a need for new risk management and mitigation strategies for California. The FAIR Plan is meant to be a crucial backstop for homeowners and businesses left without options but even for affluent homeowners in Pacific Palisades, the FAIR Plan has seen a remarkable surge in policies and total exposure.

In ZIP Code 90272 (Pacific Palisades), from September 2020 to September 2024, the FAIR Plan residential total exposure experienced a significant jump of approximately 576 percent, growing from $US436.2 million to an eye-opening US$2.95 billion. Similarly, commercial total exposure in the area skyrocketed by about 2,770 percent, from US$8.46 million to US$241.5 million.

Limits to the FAIR Plan coverage also bring to light the challenge of potential underinsurance, as the median listing price of homes in Pacific Palisades reaches the US$4.5 million mark – beyond the US$3 million FAIR Plan limit. A significant coverage gap emerges, leaving many homeowners potentially underinsured against the full scope of disaster-related losses.

This discrepancy becomes even more pronounced when the average policy value in Los Angeles County is approximately US$993,430 – a figure far removed from the realities of Pacific Palisades' high-stakes real estate market.

The FAIR Plan, working far beyond its original brief, recently issued a warning that should a major catastrophic wildfire occur, it may need to impose an assessment on all carriers in the state, a situation that potentially mirrors a precedent set in 1996, when the FAIR Plan had to assess US$260 million on carriers, at a time when the plan’s total exposure was only around US$22 billion, less than five percent of the total FAIR Plan exposure of US$458 billion as of September 2024.
 

Regulatory change

To help stabilize the insurance market, there is a recognition that regulatory change is needed. Recent regulatory advancements by the California Department of Insurance to allow the use of catastrophe models in the ratemaking process for wildfire insurance marked a significant shift in approach. On January 2, 2025, the Department started accepting Pre-application Required Information Determination (PRID) petitions.

This strategic move is aimed at improving the accessibility of insurance, by allowing insurance carriers to more accurately calculate the risks associated with wildfires. By leveraging advanced modeling techniques, insurers can offer policies that provide coverage and pricing that better reflects the current wildfire risk to properties. This is a pivotal step toward fostering a more resilient community – better prepared to face the escalating threats of wildfires.

This approach also plays a crucial role in driving broader community resilience efforts. Homeowners are incentivized to adopt fire-resistant building materials, create defensible spaces, and implement other risk reduction measures, potentially lowering their insurance costs while enhancing safety. A recent blog covers the California wildfire risk landscape and its evolving dynamics.
 

Monitoring events

While it is too early to assess insured losses in detail from the Los Angeles wildfires, it’s already clear that this is a major insured and economic loss. Even as this event continues to unfold, there will certainly be significant losses retained by primary insurance providers, reinsurance coverage is likely to be triggered, and the ILS market will be keeping a close eye on wildfire-exposed bonds, including aggregate loss levels for multi-peril deals.

Moody’s RMS Event Response team is helping clients interpret these wildfires, and clients can access the latest updates on the Support Center. Clients using the ExposureIQ application on Moody’s Intelligent Risk Platform (screenshot below), can access regularly updated wildfire footprint layer data to assess the potential impact on portfolios.

Follow Moody’s – Insurance Solutions on LinkedIn and also monitor the blog for new posts. Once the Santa Ana winds ease, this will bring hope that the spread of these fires will end and containment will take hold, and take the pressure off the brave firefighters and the residents of one of the world’s premier cities.