Illustration of Michele Steinberg
Author(s): Michele Steinberg. Published on February 24, 2023.

Coverage Conundrum

Recent disasters are complicating efforts to insure property owners in wildfire-prone areas of California. Where do we go from here?

What happens when you lose your financial safety net? Many Californians are finding out as they experience ongoing turbulence related to property insurance and wildfires.
Over the past five years, massive insured property losses have prompted insurers to cancel longstanding policies and hike rates in wildfire-prone areas. Property owners denied access to the private insurance market turn to the insurer of last resort, the California FAIR Plan, where they pay more for less coverage. The California Department of Insurance, the agency charged with keeping insurance affordable and available, has created a menu of wildfire risk reduction options for insurers to recognize, and now requires that they file rate updates that take such measures into account in the form of discounts to policyholders. But some insurers object to mandated discounts on the grounds that current pricing of policies doesn’t reflect the risk, and that they lack solid evidence about which mitigation actions work to reduce potential losses.

This conundrum, like the wildfire disaster problem itself, resists simple solutions. The state’s new Safer from Wildfires program, a menu of wildfire mitigation measures, attempts to give industry the best information available on documentable actions that reduce risk at the home and parcel level, as well as across neighborhoods. These include NFPA’s Firewise USA® recognition program, in which more than 600 California communities currently participate; and a Wildfire Prepared Home Designation, established in 2022 by the Insurance Institute for Business & Home Safety, for which individual homeowners can apply. Insurers can readily access the information they need to meet the new regulatory requirements for both programs. Yet this may not be enough to make it worthwhile for some companies to continue to underwrite residential property risks in parts of the state.
The problem is compounded by the sudden need for speed spurred by recent wildfire disasters. While it should be no surprise that properties in California face a large wildfire risk, the lack of predictive modeling and other scientific analysis has hampered the ability to map and measure relative risk. In California, regulations limiting the use of predictive models have forced insurers to review 20 years of loss to establish pricing. Until about 2015, this meant insurance pricing reflected a relatively low risk of wildfire loss. Now, however, with recent record-breaking years, it reflects the opposite. The Department of Insurance  passed rules insisting on insurance discounts to address the affordability problem. Almost as quickly, insurers ramped up efforts to promote wildfire risk modeling and to invest in artificial intelligence and machine learning to better understand both risks and mitigation efforts. A few insurers have taken the more drastic step of walking away from the state’s residential property sector altogether.

Because California is so big in terms of potential underwriting business, it is doubtful that a majority of insurers would stop issuing property insurance policies for homes. But with record numbers of property owners having to seek coverage from the FAIR plan and with rates rising, the threat of many more uninsured owners, many more foreclosed properties, and many more underinsured properties is very real. Underinsurance imperils homeowners’ ability to recover from wildfire and other disasters, yet an estimated two-thirds of American homeowners are drastically underinsured.
Fortunately, insurers are bound to comply with the state’s regulations and are actively working to balance risk and recognize mitigation, all while investing in research to validate these actions. NFPA’s longstanding Firewise program provides a rich source of data and experience that can help bridge the gap as we struggle to solve the nation’s wildfire disaster problem. 

Michele Steinberg is director of the wildfire division at NFPA. Illustration: Michael Hoeweler