Can Startups Revolutionize Home Insurance Amid California's Fire Crisis?

Good morning, it’s finance editor Jeff John Roberts filling in for Allie. Like everyone here in Southern California, I’m watching in horror as out-of-control fires consume entire communities and force hundreds of thousands around Los Angeles to flee.

The Costly Disaster

The ongoing calamity is shaping up to be the most expensive natural disaster in U.S. history. It is also an economic disaster as the destruction threatens homes and businesses in places like Santa Monica, a hub of the region’s thriving venture capital scene.

Insurance Industry Under Pressure

The financial fallout from the fires may also deliver a fatal blow to California’s crumbling insurance industry. Many leading providers like State Farm and Costco have already restricted or eliminated coverage in the state, and now home premiums that are already eye-watering will climb even higher. Sadly, many of those who lost their homes in the fires had no coverage at all.

A Call for Innovation

Is there a better way? Can we draw on technology and innovation to design a cheaper, more inclusive insurance regime? Based on the billions of dollars that VCs have poured into so-called “insurtech”, one would certainly think so.

A recent report by CNBC featured no less than 150 insurance startups looking to disrupt the industry. Most of these are focused on ancillary services like claim management and fraud prevention, but a good number are in the business of selling home insurance policies. Given this flourishing of startups with cutting edge analytic tools, it’s perhaps surprising that insurance options for many Americans are more scarce and costly than ever.

Overstated Potential

One reason for this is that, like so many other venture-backed fields, the value and potential of insurtech got vastly overstated in the go-go days of 2021. The hangover has been brutal. A TechCrunch survey from mid-2023 uses words like “death” and “disillusionment” while describing the truly horrid returns the sector has delivered for investors.

The Challenge Ahead

The bigger problem, of course, is that the home insurance market is simply too vast and capital intensive for startups to make much of an impact. There are the familiar insurance brands like Progressive and Farmer’s, whose deep pockets are backstopped by reinsurance firms with even deeper pockets. The reinsurance firms are in turn backstopped by so-called retrocession firms, with the state and federal government sometimes stepping in as a very last resort. It’s a very different ballgame than the one most startups play in, no matter how cutting edge their tech is.

Political Implications

The problem of how to provide affordable home insurance is harder still since it involves prickly political questions. These include deciding whether those who build homes in disaster-prone areas should be entitled to coverage in the first place, and how to build public infrastructure to ensure fire hydrants don’t run dry as they did in Los Angeles this week.

Finding the response to these questions will require a civil, evidence-based national conversation—one that feels far-off in light of the ugly finger-pointing already underway between President Trump and California lawmakers. Perhaps that conversation will come in time. For now, spare a thought for the millions of Americans still facing the fire threat and the brave firefighters working to contain it.

If you wish to help, here are some resources courtesy of Fortune’s Andrew Nusca: If you’re keen to lend support: The LAFD Foundation equips and supplies firefighters. The California Fire Foundation supports firefighters and affected residents. The Cal Fire Benevolent Association supports firefighters and their families. LA County’s Department of Animal Care and Control shelters displaced animals. GoFundMe has aggregated fundraisers related to LA’s wildfires as well as created its own relief fund. And the American Red Cross is on the scene, as always.