To manage these challenges, Western states and industry need to develop more accurate models that can help insurers assess and price wildfire risks appropriately. Insurers say that homes in California with what once was adequate fire protection now are burning in major wildfires. Spiraling premiums may create over-reliance on the FAIR plan, which was designed to provide basic coverage for residents who are unable to obtain it from private insurers, not to insure a property’s full value.
As lower-risk owners leave, premiums will rise further for high-risk owners, driving more of them out of the pool and raising premiums still higher.
This occurs when costs are spread across low- and high-risk customer premiums, so that low-risk customers end up subsidizing high-risk customers.Īs wildfire risks and insurance premiums increase, only owners of high-risk properties may choose to purchase fire insurance, while those with lower-risk properties opt out. There also is danger of a trend that economists call adverse selection. Insurers report that the models they use to estimate wildfire risk are no longer effective. What do these trends mean for the insurance industry?įirst, risks are increasing not only in severity but also in uncertainty.
#California fire insurance drivers#
These drivers have increased both wildfire risk and economic damages from wildfires. And development is moving into higher-risk areas. Reduced logging and forest clearing have left more fuel on the ground in forests. Climate change has increased the severity and volatility of weather factors such as rainfall and temperature. Multiple factors are creating the conditions for these blazes. Wildfires in California in 2018, the state’s deadliest and most destructive season.
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