In October, two brutal hurricanes hit the US southeast. And last week, Los Angeles went up in flames and is still burning as this is written.

These natural disasters are, obviously, a nightmare for the people directly impacted. But they might be part of something much bigger and far-reaching.

Migration and Inflation

Over the past half-century, tens of millions of Americans have poured into sunny states like Florida and California that are catastrophically unsuited for large populations. Specifically, the former is in hurricane alley and is guaranteed a direct hit from a Cat-5 one of these days, while the latter is a desert prone to droughts and raging wildfires (see today’s news).

While this ill-fated mass migration was happening, the federal government was inflating away the dollar, causing the prices of financial assets like homes — especially in popular coastal cities — to soar to stratospheric highs. Miami, for instance:

Deadly Combination

Combine massive population increase with soaring home prices, then toss in recurring natural disasters, and the result is a doom loop for the insurance companies that have to replace those multi-million dollar houses. In response, insurers are either raising their rates beyond the means of many homeowners or exiting these markets altogether.

Millions of Americans are thus left with much of their net worth tied up in houses that are prohibitively expensive to insure — if insurance is available at any price — and are therefore unsellable.

The resulting “reverse wealth effect,” in which evaporating home equity causes people to reduce spending and/or sell other assets to fill the gap, could begin at the coasts and sweep through the rest of the country, catalyzing the next financial crisis.

Some background:

California Fires Could Worsen State’s Insurance Crisis

(Epoch Times) – Thousands of high-end homes burned in recent fires could lead to losses topping $150 billion, putting further pressure on California’s insurance market.

As Californians already face significant challenges finding home insurance, the fires ravaging Los Angeles County could make it even more difficult and costly to insure properties in the future.

Deadly fires erupted beginning Jan. 7, causing at least 11 deaths, leading to the ongoing ordered evacuation at one point of more than 180,000 individuals, with another 200,000 warned to get ready for possible evacuation.

More than 10,000 buildings are damaged or destroyed across the county, according to the latest estimates, with the number expected to rise as fires are minimally contained, in what some are describing as one of the most costly natural disasters in American history. AccuWeather estimates economic losses from the fires to reach up to $150 billion.

As of the latest tally on Jan. 9, the Pacific Palisades fire destroyed nearly 6,000 structures, including oceanfront mansions in neighborhoods north of Santa Monica, where homes sell for between $7 million and $20 million, with an average price of more than $3 million across the city.

The affluent area is made up of primarily white-collar workers, according to Cal Fire demographics data, which shows slightly fewer than half of the structures affected by the Palisades Fire were built since 1970, and about 12,000 are older.

Videos of the aftermath show businesses and homes leveled by fire, with the blocks of some neighborhoods completely demolished by the inferno.

1 in 10 Homeowners in Los Angeles County Uninsured, May Lose Life’s Savings in Fires: Report

(Epoch Times) – State Farm non-renewed approximately 1,600 policies in the region in 2024, of approximately 30,000 homeowners and 42,000 apartment policies it dropped statewide, citing rising costs and risks.

“This decision was not made lightly and only after careful analysis of State Farm General’s financial health, which continues to be impacted by inflation, catastrophe exposure, reinsurance costs, and the limitations of working within decades-old insurance regulations,” the company said in a statement.

“State Farm General takes seriously our responsibility to maintain adequate claims-paying capacity for our customers and to comply with applicable financial solvency laws. It is necessary to take these actions now.”

Approximately 6,000 structures were lost in the Eaton Fire, as of the most recent count on Jan. 10. The East Altadena and Hasting Heights neighborhoods sustained significant damage.

The average value of homes in the area is approximately $1.4 million, according to the online real estate listing firm Zillow.

Insurance Market Stability in Question

“At this point, it’s not an exaggeration to say the state’s facing an insurance crisis of both affordability and availability,” Ray Mueller, San Mateo County supervisor, said during a board meeting on Oct. 8.

Seven of the 12 largest insurers, including State Farm which represents about 10 percent of the market share, according to Department of Insurance data, paused writing new policies since 2023.

Is the World Becoming Uninsurable?

(Charles Hugh Smith) – I ask the question, “is the world becoming uninsurable?” not as an expert on the insurance industry but as a homeowner who can no longer obtain hurricane insurance, and as an observer of long-term trends keenly interested in the way global risks pile up either unseen, denied or misinterpreted until it’s too late to mitigate them.

The probability that we’re entering an era of globally higher risks is increasing, and this awareness is visible in headlines such as these:

Home Losses From the LA Fires Hasten ‘An Uninsurable Future‘ (Time)

‘We’re in a New Era’: How Climate Change Is Supercharging Disasters (New York Times)

LA fires could hit European insurance firms with billion-euro losses (CNBC)

This is not an abstraction, though many are treating it as a policy debate. As noted previously here, the insurance industry is not a charity, and insurers bear the costs that are increasing regardless of opinions and policy proposals. Insurers operate in the real world, and their decisions to pull out of entire regions, reduce coverage and increase premiums are all responses to soaring losses, a reality reflected in these charts.

Losses rise with inflation, of course, but the losses are rising far above background inflation.

This raises a point few seem to ponder: the world isn’t simply a political structure, yet virtually all the proposed solutions to every problem are political or technological in nature: we can solve this or that politically, or with AI. That the private-sector can trigger crises that have no political or technological fix is on very few pundits’ radar.

The problems being exposed do not lend themselves to tidy political / policy fixes that magically return the world to a past era of lower risks. Risks and losses cannot be extinguished, they can only be transferred to others. This is the intrinsic limit of political fixes: we take the risks and losses and transfer them to others lacking the political power to contest the transfer.

Or we transfer the risks and losses to the entire system, increasing the potential for a systemic collapse.