The Changing Regulatory Landscape of California
On June 12, 2024, the California Department of Insurance (DOI) unveiled a new plan allowing insurers to use catastrophe models in ratemaking only if they increase their writing of policies in high wildfire risk areas. The department released a statewide wildfire risk map, identifying high-risk ZIP codes and counties where insurers must expand coverage.
Understandably, the risk-prone counties specified by the CA DOI contain a high concentration of residential properties with elevated wildfire risk, according to CoreLogic’s Wildfire Risk Score (Figure 7). The properties with the highest risk scores have the highest probability in any given year of being damaged or burned resulting in claims by any wildfire, even the high-frequency/low-severity fires. Competition to underwrite low wildfire risk properties in one of the CA DOI-appointed high-risk counties will be high.
Figure 7: The percentage of very high risk properties in counties specified by the California DOI for upcoming regulatory changes.
But even moderate to high-risk properties can be viable options – with less competition – in areas where the probability of a high-severity fire is low. A wildfire that causes $15 billion of insured loss in the state of California, like the Paradise fire of 2018, has a 2% probability of occurring in any given year, according to CoreLogic’s probabilistic Wildfire Model. The annual probability of a fire like Paradise occurring in any one of the counties outlined by the CA DOI is much lower (Figure 8).
Figure 8: The OEP of an extreme 2% wildfire event in counties throughout California. Darker shading represents a higher chance of an extreme wildfire event.
Combining the Wildfire Risk Score data with the probabilistic U.S Wildfire Model output highlights counties with a high proportion of viable homes that are not likely to be damaged or destroyed by any type of wildfire, including both high- and low-frequency events. For example, there is a high proportion of homes with low, moderate, and high wildfire risk in Napa, Santa Cruz, Del Norte, and Modoc Counties (Figure 7, light yellow colors). The annual probability of a severe fire like Paradise is also quite low (Figure 8, lighter red color). These four counties represent ideal markets for carriers who need to comply with the DOI but are less likely to experience high or severe claim volume due to damage from both smaller, frequent events and extreme, infrequent events.
Quality data and insights are key to supporting a healthy insurance ecosystem in a state that struggles with a difficult peril like wildfires.
The Efficacy of Wildfire Mitigation: The Case of Paradise, California
The Camp Fire of 2018 decimated over 90% of the Town of Paradise and underscored the critical need for effective wildfire mitigation strategies. Funded by the California Resilience Challenge Grant, a collaborative study by the Town of Paradise, Milliman, Inc., and CoreLogic assessed individual- and community-level wildfire mitigation approaches to estimate wildfire risk reduction and the impact on homeowners insurance premiums in California’s wildland urban interface (WUI).
Individual Homeowner-Level Mitigation
Homeowners can participate in the Insurance Institute for Business & Home Safety’s (IBHS) Wildfire Prepared Home Program™. The program enables homeowners to take preventative measures for their home and yard to protect against wildfire.
Create a five-foot buffer
Around the home by removing vegetation, trees, overhanging branches, grass/turf, wood fencing, etc. within five feet of the home.
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Do not store anything—including vehicles—within the five-foot buffer zone.
Prepare the home
With a Class A-fire rated roof, metal gutters, and ember resistant vents.
Maintain the deck & yard
Within 30 feet of the home by routinely clearing tree debris, replacing combustible furniture and moving firewood and propane tanks.
If every homeowner in Paradise adopted the recommended steps in the Wildfire Prepared Home Program™, the aggregate expected wildfire loss could decrease by 53% relative to pre-Camp Fire conditions.
Community-level mitigation efforts include:
Leveraging Wildfire Informed Development Patterns (WIDP)
The strategic planning of development patterns informed by wildfire risk.
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Selectively decreasing the number of structures within town boundaries, focusing on rebuilding in areas with lower wildfire risk and being intentional with land use planning.
Implementation of external buffers
Well-maintained areas with low fire spread potential on the border of the town.
Implementing WIDP can reduce average expected losses by up to 15% per property. External buffers reduce aggregate expected losses by 35%.
Combining individual home- and community-level mitigation strategies compounded the risk reduction effects leading to a 75% reduction in expected loss per property in high-risk areas like Paradise. Most importantly for the people in communities like Paradise that will contend with wildfire risk, the loss reduction corresponds to a 55% reduction in average total insurance premiums. Any proactive measures to ease insurance availability and price is beneficial to the people of California.[1] [2]
[1] The mitigation scenarios assume a 100% compliance rate with IBHS Wildfire Prepared Home mitigation standards within the Town of Paradise. This is not intended to be reflective of reality because of possible reluctance to comply, as well as surviving / existing structures not meeting these standards. It is intended to serve as a starting point for understanding the comparative efficacy of alternative home- and community-level strategies.
[2] At the time of the study, neither the use of catastrophe models to set total wildfire premium nor the inclusion of the net cost of reinsurance was allowed for admitted homeowners policies under California regulations. To the extent that actual premiums allowed under California regulations differ from the risk-based premiums assumed in this analysis, results are likely to differ as well.