March 3, 2020–What Are the Most Effective Ways to Insure and Mitigate Wildfire Risks? (Wharton)

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The extreme wildfires of the last several years, from California to Australia, have raised broad concerns about the future of wildfire risk management programs. Total damage and economic losses caused by California wildfires in the past three years are estimated to be $565 billion. The Camp Fire in November 2018 was the most destructive wildfire in California history, damaging or destroying more than 18,800 structures with total damage estimated at $16.5 billion. With $12.5 billion of these losses covered by insurance, it was the most expensive insured disaster that year. The threat of even more extensive wildfire losses due to climate change, as illustrated by NASA, highlights the need for homeowners and communities to invest in cost-effective mitigation measures.

Wildfire can be characterized as an interdependent risk. More specifically, the damage faced by homeowners depends not only on their own decision whether to invest in fire protection measures, but also on the risk reduction investments of their neighbors. An article in the Los Angeles Times characterizes this interdependency, noting: “Fires that spread from house to house generate a force of their own. Embers, broadcast by the wind, find dry leaves, igniting one structure then another, and the cycle is perpetuated block after block. Break that cycle and the fire quits, and destruction can be minimized.”

While surveys like this one in Archuleta County, Colo., have demonstrated that the behavior of others is not necessarily the primary barrier preventing individuals from adopting sufficient mitigation measures, it does influence the insurability and the affordability of wildfire. Since the risk of a homeowner depends in part on the mitigation actions of everyone in the area, insurers cannot typically offer property-level mitigation discounts on pricing. If an entire community invested in wildfire mitigation, however, that could be an input to lower insurance premiums. To view the full article visit Wharton.