Systemic Insurance Events: A closer look at LA wildfires and its parallels to wide-spread cyber events from a risk management perspective

Impact of LA wildfires and insurance coverage behind it

As per information from the 2nd calendar week of 2025, it has been reported that the recent large-scale wildfires in LA have claimed 16 lives and over 12'000 structures (homes, businesses, and vehicles) have been destroyed so far, making it one of the most destructive wildfires in California’s history. What is more, approximately 150'000 to 180'000 people remain under evacuation orders, with thousands displaced and residing in shelters.

The fires are projected to cause economic losses between $135 billion and $150 billion according to AccuWeather and analysts from JP Morgan and RBC Capital Markets estimated insured losses of up to $20 billion as per 10.01.2025, which could be even higher depending on the longevity of the situation

The seemingly evident insurance gap stems from a few interconnected factors, but besides of the indirect and/or uninsured costs arising from the tragedy, it is mainly created because many homeowners in this high-risk wildfire area have been unable to secure traditional fire insurance due to insurers pulling out of the market or drastically increasing premiums. This has forced many to rely on the California FAIR Plan, which is a last-resort insurance option that offers limited coverage (up to $3 million for residential properties) and comes with higher premiums. Unfortunately, some homes, particularly high-value ones, remained underinsured and according to reports from LendingTree, nearly 10% of homes were even uninsured because of these limitations.

While the situation is extremely unfortunate for insurance buyers, there are two very important aspects to factor in, before blaming the "evil insurers" for gaps in loss indemnification:

• Inadequate Pricing Regulations: California’s regulatory framework, established under Proposition 103, restricts insurers from setting premiums based on forward-looking risk assessments. Instead, they must rely on historical data, which fails to account for escalating wildfire risks. Additionally, delays in approving rate increases have created a de facto price cap, making it challenging for insurers to adjust premiums to reflect actual risks and costs.
• Market Stability Concerns: Insurers argue that their withdrawal is necessary to stabilize the market and avoid catastrophic failures. Continuing to operate in the LA fire insurance market under current conditions could lead to insolvency, which would harm both, policyholders and the broader insurance market, and could have a overarching effect on other insurance products.

Another crucial point to consider is that more fireproof measures could have significantly reduced the losses caused by the LA wildfires and potentially attracted more insurers to provide coverage in such high-risk areas. Studies and real-world data like Guidewire′s HazardHub reports (analysis of data from 91,800 home inspections in California) showed well in advance that implementing fire-resistant construction materials, such as ember-resistant vents, fireproof roofing, and siding, can reduce the likelihood of ignition and limit damage by up to 74% when combined with other mitigation strategies like defensible space maintenance. Additionally, passive fire protection measures, such as flame-retardant fabrics and compliance with updated building codes, not only safeguard properties but also improve insurability by lowering perceived risks for insurers. Lack of regulatory enforcement and misaligned risk perception by homeowners are only two of many reasons, why fireproof measures were not widely implemented before the LA wildfires.

• https://www.guidewire.com/resources/blog/technology/analyzing-the-effectiveness-of-wildfire-mitigation-measures?t
• https://www.fordje.com/blog/protecting-la-communities-from-wildfires-key-changes-to-wildland-urban-interface-fire-safety-standards?t

Parallels between wildfires and information security threats

Several wide-spread cyber events can be compared to the LA wildfires in terms of their systemic impact, financial losses, and challenges for insurers.

The MOVEit Transfer Data Breach (2023) impacted over 94 million users, more than 2'500 businesses, and damages exceeding $10 billion. Similar to how wildfires spread uncontrollably across regions, this breach affected a vast network of organizations due to vulnerabilities in widely used software. The cascading effects disrupted operations across industries, similar to the ripple effects of wildfires on communities and economies.

Another example would be the Microsoft Exchange Server Attack (2021), which impacted over 30'000 U.S. businesses and 60'000 organizations globally were compromised through four zero-day vulnerabilities. Much like wildfires fueled by environmental conditions, this attack exploited systemic weaknesses in widely deployed infrastructure. The scale and interconnectedness of the systems magnified the damage, highlighting the accumulation risks insurers face.

While property and fire insurance have solid historic data which even allows quite sophisticated predictions for the future, cyber insurance is still in its early development and reliable data is limited. Events like MOVEit, the Microsoft Exchange attacks or the more recent non-malicious Crowdstrike incident were almost impossible to predict.

Nevertheless, insurers can draw several parallels between wildfires and broad cybersecurity events, as both involve systemic risks, unpredictability, and significant financial exposure - the most prominent ones are as follows:

1. Proactive risk management: Just as homeowners need early warning systems and firebreaks, organizations need robust firewalls and monitoring capabilities. Preparedness is key in both scenarios, where being reactive can lead to significant losses.
2. Communication plays a crucial role: In wildfires, clear communication saves lives. In information security, clear protocols and response plans prevent breaches. Both demand continuous updates and training; landscapes shift, and so do cyber threats.
3. There's an element of unpredictability: You may not know when or where a threat will strike, but the focus should be on minimizing damage and recovery speed. Investing in prevention is far more cost-effective than dealing with the aftermath.

To prevent insurance gaps in future widespread cyber events, lessons from the LA wildfires highlight the importance of proactive measures such as public-private partnerships, innovative risk modeling, and regulatory reforms. Just as California is now beginning to allow insurers to use forward-looking catastrophe models and incentivizes risk mitigation efforts like fireproofing homes, the cyber insurance market could benefit from similar strategies, but collaboration between insurers, security vendors and policyholders has to be even closer.

For instance, fostering collaboration between insurers, governments, and businesses to develop standardized frameworks for assessing and pricing catastrophic cyber risks can strengthen resilience. Additionally, offering innovative incentives for organizations that implement robust cybersecurity measures, such as regular risk assessments and transparency about vulnerabilities, can encourage proactive risk reduction. However, it is also crucial to retain underwriting discipline on the insurer side, especially when new competitors enter cyber insurance markets with unreasonably low premiums due to temporary beneficial claims environments - this can take a turn quite quickly and flush the overcapacity out of the market as fast as it entered.

These steps, combined with clear policy terms to address non-affirmative cyber exposures, can help to bridge protection gaps and ensure better preparedness and coverage in the face of escalating systemic risks.