California’s $10 trillion residential property market is under siege as wildfires wreak havoc across the southern part of the state.

What Happened: The fires, which have already destroyed more than 5,000 buildings, pose a potential risk to the stability of the state’s insurance market.

A report by Bloomberg said that the wildfires have struck three areas identified as particularly susceptible. One of these is the Pacific Palisades neighborhood in Los Angeles.

Michael Wara, a senior researcher and wildfire expert at Stanford University told the outlet, “Pacific Palisades really jumps out, even in the context of high-risk areas in California.”

As of Friday, more than 57,000 structures were in severe danger, and more than 150,000 people were under evacuation.  JPMorgan Chase & Co. (NYSE:JPM) estimated on Thursday that the insured damages could surpass $20 billion, making it the most expensive wildfire in US history.

Also Read: SpaceX, Apple, Airbnb And More Companies Pitch In To Support California Residents After Wildfires: ‘We Want To Help’

The wildfires have sparked concerns about the future of insurance for homes in one of the world’s most valuable property markets.

"This sustainable insurance strategy is built for events like this," Michael Soller, deputy commissioner of the Department of Insurance said. "It is intended to stabilize the insurance market for the long term."

Daniel Swain, a climatologist at the University of California, Los Angeles, said, “Could a single event cause insurers to become insolvent? That’s the great fear.”

The escalating departure of private insurers has left the state-backed insurer of last resort, the California FAIR Plan, in a precarious position.

The FAIR Plan could be on the hook for billions, as it estimated its own exposure in the larger Pacific Palisades area at nearly $6 billion.

According to the report, the State Farm, California's largest insurer, reduced nearly 70% of its policies in a Pacific Palisades ZIP code last year, while FAIR saw its policy count in the same area surge by 85%.

This shift has left FAIR potentially liable for billions. As of September, the plan estimated its exposure in the broader Pacific Palisades region at nearly $6 billion.

However, its most recent public financial report from spring of last year revealed just $200 million in surplus cash reserves and $2.5 billion in reinsurance—coverage designed to protect insurers in catastrophic scenarios—leaving a significant gap in resources.

Insurers with significant exposure to California’s homeowners' market faced sharp declines on Friday, as the devastation caused by the Los Angeles wildfires escalated.

Allstate Corp. (NYSE:ALL) shares plunged 6%, while Chubb Ltd. (NYSE:CB) and Travelers Companies Inc. (NYSE:TRV) both dropped more than 3%, ranking among the biggest losers in the S&P 500. Meanwhile, American International Group Inc. (NYSE:AIG) and Progressive Corp. (NYSE:PGR) saw declines exceeding 1%.

According to JPMorgan, Allstate, Chubb, and Travelers are the insurers most exposed to the financial impact of the wildfires. The firm highlighted that Chubb’s focus on high-net-worth clientele in the region could lead to particularly elevated exposure.

Why It Matters: The current wildfires and the looming insurance crisis underscore the increasing threat of climate change. With the fires continuing largely unchecked, many are left pondering if this event will permanently alter the relationship between climate risk and homes in California.

The escalating crisis not only threatens the property market but also poses a significant risk to the state’s economy.

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