This post is part of a series sponsored by CoreLogic.
Nine of the 20 largest wildfires in California have occurred since 2020, including four so far in 2021. Five of the 19 largest wildfires in Oregon and three of Colorado’s worst wildfires all occurred in 2020. This should indicate to insurers across the United States that the industry needs to shift its approach to wildfire risk. In its 2021 Wildfire Report, CoreLogic notes that climate change is influencing weather conditions that make wildfires more frequent, larger, and more intense as the years go on. Preparing for and responding to wildfire risk to help protect homes and business owners is more critical than ever. Here are the top things insurers should do to better prepare for Wildfire.
1. Stop thinking of wildfire as a season – this peril is a threat all year.
Wildfire patterns that used to be confined to late summer months are a more continual threat. Long-duration dry conditions, which often result in record-setting droughts, contribute to the increasing number and intensity of fires in recent years, as seen in 2015, 2017, 2018, and 2020. Firefighters and legislatures are working year-round to introduce wildfire mitigation measures, but increased housing activity in the popular wildland urban interface means wildfires are a threat all year. Ninety-seven percent of wildfires in the wildland urban interface are ignited by humans and half of those are caused by electricity equipment, like 2003’s Witch Fire and 2018’s Camp Fire that destroyed the town of Paradise.
2. Focus on property risk characteristics like structure age and proximity to other structures in addition to surrounding vegetation.
While surrounding vegetation is a major contributing risk factor for wildfire exposure, another fuel is topping the list for wildfire risk attributes. New structures burn 80% faster today than they did 30 years ago. This is because of the widespread use of petroleum-based furnishings in home and commercial buildings, including petroleum-based furniture foam, carpet, drapes and plastic piping and hoses. This, in combination with recent changes in home construction like manufactured trusses and the widespread use of composite materials, means that fire consumes homes quicker and spreads from structure to structure much more rapidly than it did decades ago.
3. Adopt probabilistic modeling to get a clearer picture of a portfolio’s wildfire risk exposure.
The environment is changing too rapidly to rely solely on wildfire loss history to plan for future wildfire mitigation and response. Housing encroachment into wildfire areas, excessive fuel growth arising from permissive forestry management and environmental changes from climate change invalidate experience-based loss projections. Probabilistic risk models enable a more comprehensive view of prospective risk because they incorporate up-to-date risk data like fuels; topography and weather; property characteristics; modern building codes; mitigation practices to improve risk; and the latest fire-fighting practices. Based on event-simulation platforms, the latest risk models enable effective zonal aggregate risk management and other risk management techniques successfully leveraged for other natural catastrophe perils like earthquakes and hurricanes. Probabilistic risk models enable stronger risk management with a forward-looking view of the risk.
4. Insure to reconstruction cost value and reduce underinsurance.
After the 2017 Tubbs Fire in northern California, many homeowners discovered their properties were underinsured by hundreds of thousands of dollars, leaving them without enough coverage to rebuild. Underinsurance leaves an insurer’s customers dissatisfied and exposes the insurer to reputational risk. Insurers can work with homeowners to regularly reevaluate the reconstruction cost value (RCV) of a home to reduce the likelihood of underinsurance, as material and labor costs for reconstruction are always changing. According to CoreLogic data, reconstruction costs are growing in all top 10 states with the highest acreage burned in 2020. Arizona led with nearly 10% RCV growth from Q2 to Q3 2021, with California at the bottom at 6.9% growth. With the national average for RCV growth by state from Q1 to Q2 2021 at 8.98%, almost all states in the wildfire-prone West have seen higher than national average growth.
5. Work with homeowners to increase resilience.
The frequency and severity of wildfire losses today is not sustainable – without effective risk mitigation, communities and businesses are at risk. Resilience is often measured as how fast you can recover from a catastrophe — and the deeper the wound, the longer it takes to heal. Homeowners, insurers, and city planners each have an important role when it comes to reducing the devastating impacts of wildfires. Homeowners can put in place appropriate wildfire mitigation measures to reduce the opportunity for fire to ignite a structure. This may include steps such as reducing flammable foliage near the structure, eliminating or reducing gaps beneath the roof, and ensuring that the structure is composed of Class A fire-resistant material. Clearance of noncombustible zones, community fire awareness, and government supported programs like the FEMA Hazard Mitigation Grant Program can also have a profound effect on community resilience.
Looking ahead, insurers, city planners and homeowners each play an important role in reducing the devastating impacts of wildfires. While these natural catastrophes are often unavoidable, they can be prepared for. With the latest data and insights, homeowners can be better informed of their risk and accelerate their recovery.
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