California's devastating wildfires have exposed an insurance crisis plaguing many disaster-prone areas around the world, and risk pushing up premiums in Australia.
The fires are shaping up to be one of the costliest disasters in US history.
Thousands of homes have already been reduced to ashes and fire threats are expected to remain critical for days.
Analysts estimate that the insurance price tag could be more than $US20 billion ($32 billion).
The hefty payouts come as many Californians have had their insurance policies cancelled.
And given the global nature of the market, experts say the impacts will not only be felt in the US.
What is causing the insurance crisis?
In recent years, many major insurers have been pulling back on property coverage in California as climate change made wildfires, floods and windstorms more frequent and damaging.
In 2023, seven of the 12 largest insurance companies by market share in the state either paused or restricted issuing new policies.
It has made it extremely difficult for home-owners in high-risk areas to obtain or afford insurance.
"There's been a mass exodus of big players from the market in these parts of California," Ben Keys, a real estate and finance professor at the Wharton School of the University of Pennsylvania, said.
"We've seen enormous non-renewals recently."
Insurance in California had been further complicated by long-standing state regulation which prevented insurers from using catastrophe modelling to set premiums.
Many companies cited the restriction as their reason for retreating from the state's insurance market.
As a last resort, an increasing number of home-owners had turned to a government-backed Fair Access to Insurance Requirements (FAIR) Plan.
But the policies can be very bare bones, and the scheme was also grappling with its own challenges, including lack of capital.
Insurance gaps exposed
Paula Jarzabkowski, a professor of strategic management at the University of Queensland, said the California crisis exposed what was known as the disaster insurance protection gap.
Professor Jarzabkowski, who is a global expert on the issue, described the protection gap as the extent to which potential economic losses were not covered by insurance after a disaster.
The losses may be underinsured, or there may be no insurance coverage in place.
The gap is a growing problem in Australia, the US and other other disaster-prone countries, worsening as climate disasters continued to inflate premiums.
The latest Actuaries Institute report showed that 15 per cent of Australian households were under extreme insurance stress, facing premiums that were more than one month's gross annual income.
"We need to assume that there are more who are also underinsured or not insured at all in Australia because premiums have gone up so much, and due to cost of living," Professor Jarzabkowski said.
"They simply can't afford insurance."
Who fills the gaps?
When people are not adequately insured to rebuild after a disaster, the costs are recharged to the market which means everyone's premiums go up.
"Insurance is basically a big pooling mechanism, so if some of us have losses, then everybody's costs go up a bit to cover all those losses," Professor Jarzabkowski said.
Disasters the size of the LA fires are often passed onto the global reinsurance market.
The global reinsurance market is where insurers transfer some of their risk to other insurers in exchange for premiums.
It is essentially where insurers buy their own insurance.
The reinsurance market covers disasters around the world, and lately it has been stressed.
Global annual insured losses from natural catastrophes totalled more than US$100 billion for six out of the last seven years, according to the Insurance Council of Australia (ICA).
Alix Pearce, the ICA's general manager of climate, social policy and international engagement, said reinsurers were failing to earn their cost of capital.
"In response, they have increased prices and reduced capacity, pushing global reinsurance costs to 20-year highs last year," Ms Pearce said.
"Australian insurers faced cost increases of up to 30 per cent."
Professor Jarzabkowski said the disaster could put further pressure on the Australian insurance landscape.
"Premiums have gone up around the world already over the last few years … California will certainly make sure they don't go down, and may make them go up more," she said.
"What the cost of capital to Australian insurers will be when they next go for reinsurance, which is usually done once a year, I can't say, but it certainly won't go softer."
What can Australia learn?
Moody's Ratings expected insured losses from the LA fires to amount to billions of dollars given the area's high values of homes and businesses.
The LA disaster had shown the "scary" reality that fires were not isolated to small, regional communities, Professor Jarzabkowski said.
"What LA has shown us is that high-density population areas can also go. I think that's pretty scary for Australia."
At least 230,000 Australian homes are at risk of flooding every 20 years and 5.6 million are at risk of a bushfire, according to the ICA.
Australia has been working on solutions to build the resilience of communities to withstand disasters, such as strengthening building stock and using fire-resistant materials.
The federal government has also implemented schemes in recent years to help reduce premiums for people in high-risk areas.
A $10 billion cyclone and flood reinsurance pool was set up in 2022, in a bid to bring down home and business insurance premiums in northern Australia.
But Ms Pearce said more longer term approaches were needed to address climate change.
"Australia's population continues to grow in places with greater exposure to storms, floods, bushfires and cyclones, if we don't implement policies to mitigate this risk, we will continue to see a widening of the insurance protection gap," she said.
Professor Jarzabkowski said that the fragilities of the insurance industry in the face of climate change were clear.
The priority now was to reduce risks.
"Climate change has really turned the dial up quite dramatically in the last few years," she said
"The big question that really needs answering is: How do we move people away from areas that are disaster prone?"
ABC/wires
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