Why Wildfires Are Increasingly Becoming a Burning Issue for Insurance Providers and Homeowners

For millions of years, wildfires have been a critical environmental occurrence. Among the causes of this phenomenon is human ignition in highly populated regions, which is either arson or unintentional, and lightning in marginalised areas. Considerable losses can be incurred in populous regions due to the perils that wildfires impose on infrastructure and human lives. Essentially, increase in the affected area by wildfires raises the severity level and potential losses that could be suffered. In recent times, changes in land use and socio-economic structures have exposed more areas to risks resulting from wildfires. For instance, rural-urban migration in Mediterranean Europe has created a build-up in vegetative matter owing to the decrease in agricultural activities thus amplifying dangers of severe fires. Moreover, in North America, population growth in the wildland and urban regions also raise the possibility of wildfire explosion.

Currently, several North American areas at the greatest risk of exposure to these fires have substantial insurance penetration levels. Consequently, the likely amplification of wildfires will inevitably pose several effects on insurers, particularly liability lines and property insurance policies. In California, a crisis in the form of insurance policy cancellation and nonrenewals, and sudden premium increases for individuals living at the intersection between urban and wildland regions, is already sparking anxiety among the State's residents who feel that insurers are becoming concerned about the intensified ferociousness and recurrence rates of wildfires (Veklerov, paragraph 7). In an interview with Dave Jones, the State Insurance Commissioner, he states:

These fires have consumed areas that were thought to be at lower risk. Now it is clear they are not. We are looking at a future where there will be increasing challenges for insurance availability for some homeowners in California. The areas where this is a problem are likely to expand (Veklerov, paragraph 8)

Consumer advocates and local leaders have made their intentions clear by suggesting that homeowners tasked with alleviating fire hazards should receive more financial incentives from insurance providers. A bill by the State Senator is in the offing that will demand insurers to give such cut rates and get authorized by the Department of Insurance prior to deducting policy volumes in areas under the greatest risk to these wildfires. Conversely, insurance leaders are apparently refuting these demands by claiming that the industry is operating at an optimum level and thus policy providers should perfectly balance their risk coverage whereas upholding cost-effectiveness and creditworthiness. Furthermore, these leaders corroborate the move by insurers opting not to renew or formulate new policies in particular regions by assuring that this guarantees payment of insurance claims in case the wildfires erupt (Veklerov, paragraph 19).

However, underestimation of insured costs for wildfires would be catastrophic, especially in light of the recent tug of war between insurance companies and homeowners. According to Munich (14), calamitous wildfires triggered about $590million in insured losses in 2012 while $28.5billion in financial losses were incurred between 1980 and 2011, where only 45% of the losses were covered. Wildfires in California have caused $9billion insured losses as from 1990. In another incidence, the Colorado Black Forest Fire that occurred in June 2013 approximately resulted in $293million in insured losses. All these cases exemplify the magnitude of expenses likely to be incurred due to wildfires and thus proving to be a burning issue for insurers. To worsen the situation, if the projected increase in the ferocity and frequency of wildfires as the current trends show, a concurrent upsurge in insured costs due to these fires will be unavoidable.

The growing urbanisation in high-risk areas and the evolving building regimes make it challenging to predict insured losses for wildfires. Exposure of property to wildfire has somewhat increased owing to the rising number of dwellers in the wildland-urban interface areas, which are characterized by high property values. California, for instance, has over 5million people living in these interface areas with about 40% of new residential areas sprawling in these high-risk regions. Business disruptions also possibly occur following a wildfire (Munich, 19). Most insurers have specified that their business interruption policies cover any intermission before the fire, in the course of evacuation and after the fire. Nonetheless, some insurance policies demand that direct physical destruction to the asset has to be evident prior to triggering the business disruption cover. This coverage, however, can fluctuate widely and thus modifications have to be made depending on the level of damage and order of civil authorities. Matt Bordonaro, Travellers Insurance Company spokesman acknowledges that:

"Retention is our goal, but it is balanced with thoughtful and disciplined underwriting. We routinely evaluate our risk exposure and make adjustments as necessary" (Veklerov, paragraph 6)

Proof of human activity being the cause of wildfires handovers claims to liability insurers. This was the case in Southern Australia whereby much of the coverage load from the Ash Wednesday forest fires was passed onto liability insurance providers albeit taking several years to determine liability as well as for the property insurers to recover the coverage that they had initially provided. Homeowners will, nevertheless, be concerned by nonrenewals even in light of these policy transfers. Dave Jones, the California State Insurance Commissioner claims that the number of individuals joining the FAIR plan has not increased recently citing the existing market limitations responsible for this drop in enrolment (Veklerov, paragraph 9). According to United Policyholders' executive director, Amy Bach, the aftermath of each wildfire has been epitomized by slight periodic nonrenewal waves, whereby these fires draw the attention of top managers at the corporation who resort in slashing coverage counts in particular perilous areas. In recent times, however, these waves or plagues have become more visible as technological innovations enable insurers to swiftly establish the level of risk for residences through data inputs and satellite images.

After unravelling the reasons behind nonrenewals, it is apparent that several considerations have to be made to determine the property's exposure levels. These factors include the concentration of houses in an area and the extent of devastation of the wildfire incident. A new issue for insurers builds up from extensive land use, particularly encroachment of forested areas by home developers, which prompts the insurers to lower their premium rates. Nevertheless, Frazier, from State Farm argues that the Department of Insurance needs to relinquish some control over premiums for the insurers to throw away their cancellation schemes. Residents who are notified with nonrenewals cannot forego their covers altogether. Home insurances are requisites for mortgage plans and thus residents may fear that switching providers may result in huge premium increases for them. Therefore, to avert the risks discussed above that may arise due to wildfires, homeowners are advised to allow defensible spaces between successive houses to minimize the spread rate of these fires. Moreover, insurance companies are asked not to withdraw policies prior to physical determination of the actual perils and mitigation exertions.

Works Cited

Munich, R. E. "Natural Catastrophe Year in Review. 2013." (2012).

Veklerov, Kimberly. "Some Homeowners Lose Insurance Coverage As Wildfire Risks Rise". San Francisco Chronicle, 2018, https://www.sfchronicle.com/bayarea/article/Some-homeowners-lose-insurance-coverage-as-12469346.php. Accessed 21 Mar 2018.