WildfiresInsurance Markets Face Challenges in Higher Fire-Risk Areas

Published 21 September 2020

Wildfires in California destroy thousands of structures each year, and in 2017 that number jumped to 10,800. In 2018, wildfires wrought even greater destruction, with more than 22,000 structures destroyed. Those conflagrations can devastate homeowners and bring heavy costs for the insurance industry. In a new study, RAND researchers found that while the insurance market in lower-fire-risk areas was working relatively well as of 2017, higher-fire-risk areas faced challenges.

Wildfires in California destroy thousands of structures each year, and in 2017 that number jumped to 10,800. In 2018, wildfires wrought even greater destruction, with more than 22,000 structures destroyed, according to the California Department of Forestry and Fire Protection. Those conflagrations can devastate homeowners and bring heavy costs for the insurance industry. To assess how fire risks will affect the California insurance market, and consequently homeowners, RAND researchers undertook a novel study in two fire-prone areas in Northern and Southern California. They found that, while the market in lower-risk ZIP codes within those two areas was working relatively well as of 2017, higher-risk ZIP codes faced challenges.

The RAND report — California Wildfires: Can Insurance Markets Handle the Risk? – notes that those challenges may intensify as wildfire risks increase, potentially affecting the health of the insurance market, policy affordability, coverage adequacy, and insurer profitability. The RAND team found that wildfire risk is likely to increase markedly in some areas under business-as-usual greenhouse gas (GHG) emissions scenarios.

The study focused on two areas: a 1.9-million-acre region in the Sierra Nevada foothills spanning parts of Placer, Nevada, and El Dorado Counties in Northern California, and an 860,000-acre region in western San Bernardino County, east of Los Angeles in Southern California.

In the Northern California study area, the researchers found that the average number of acres burned each year may double by mid-century and double again by 2100 under a business-as-usual GHG emissions scenario. The researchers project that an aggressive and successful GHG emissions control strategy would stabilize the average number of acres burned in the second half of the century, keeping the average annual risk at mid-century levels. In the Southern California study area, the researchers project that the number of acres burned may not change substantially.

Policymakers, insurers, and homeowners all are exploring how to adjust to changing wildfire risk in California. This research is designed to help them consider policy options for the insurance market.

Examining Wildfire Risk and Insurance Markets
The RAND researchers focused on four main questions:

1. What is the current wildfire risk in the study areas and how might climate change affect it through the end of the century?

2. How well is the residential insurance market currently working in higher-risk fire areas?

3. How might climate-induced changes in wildfire risk affect the residential insurance market?

4. What factors can influence the effects of climate change on the residential insurance market?