Since the beginning of this year, the Southern California wildfires have destroyed more than 16,000 structures and caused between $30 billion and $250 billion in damage.
No matter which estimate is closer to reality, these will be the costliest wildfires in U.S. history and further test a property insurance market stretched by years of devastating wildfires.
Marc Ragin, associate professor of risk management and insurance at the Terry College, studies insurance markets more untenable due to climate change — such as Florida and California. He helped found the Center for Innovation in Risk-analysis for Climate Adaptation and Decision-making with leaders from the insurance industry, state and federal disaster management agencies, and University of Georgia and Duke University researchers studying climate and risk management.
- Is there any way to put the loss from the recent California fires in perspective? Are there any hurricanes that can compare to it? Why are the estimates so divergent?
I expect it will end up in the top 5 largest insured-loss disasters in recent history. Current estimates of insured losses are around $40 billion. That puts it around the same size as Hurricanes Ida (2021, $40.5B), Sandy (2012, $39.9B), and Harvey (2017, $37.6B). Importantly, these are estimates of insured losses. The economic cost of these fires — including losses that may not be insured, like lost jobs and wages, cleanup costs, and infrastructure damage — will be much higher.
Most of the estimates in the $30-50 billion range consider the immediate impacts, such as lost lives, destroyed structures, displacement costs, and business interruption. The $100+ billion estimates tend to include the longer-term consequences like impacts on air quality, healthcare costs for people exposed to smoke, and permanent migration away from the affected area (and how that might affect local businesses). Those costs are very important but are also difficult to estimate.
- Even before this fire, private insurers pulled out of the California market. Why? Has this happened in other states?
Insurers have been pulling out of the California market because the risk is too high, and they can’t charge enough to insure it. Insurance prices are regulated by each state’s insurance commissioner, and California has some strong restrictions. They’ve eased those restrictions to bring insurers back to the market, but that doesn’t change that the risk of wildfire is so high that some insurers won’t cover it at almost any price.
We’ve seen market exits in some states before. After the 2004 and 2005 hurricane seasons, a number of insurers exited affected states in the Southeast. And recently, insurers have been leaving other high-risk Western states due to the wildfire risk.
- What is California’s FAIR Plan, and how does it shape the insurance market in the state? Does it function the same way as Florida’s Citizens Property Insurance Corporation?
FAIR plans are considered “insurers of last resort” — they’re only intended for the highest-risk homeowners who can’t get insurance from the private market. They are usually expensive and provide less coverage than someone could get from standard insurance markets. In fact, the website for Colorado’s FAIR plan explicitly states it is “the most expensive way to insure a property” and offers “more limited coverage” than private markets. Citizens in Florida is also an insurer of last resort.
- With increasing claims from recent hurricanes and wildfires, what is the status of these state-backed plans? Are they solvent?
These state-backed plans are going to face significant challenges. All of them — hurricane-exposed plans in the Southeast and wildfire-exposed plans in the West — are covering way more homes than they’re designed to. Climate change, development in high-risk areas, and increased costs of construction have led to larger-than-expected losses for the private insurance market, leading insurers to pull back from high-risk areas. Many homeowners have had no choice but to buy from their state’s FAIR plan.
The California FAIR plan has tripled exposure since 2019. They don’t have enough cash on hand to pay claims. They will need to fill that gap by charging an assessment on insurance companies in the state, and then they will access their reinsurance — a financial backstop common in the insurance industry. But I believe they don’t have sufficient reinsurance for this event, which means they may need to increase the assessment or even issue bonds to cover the shortfall.
- What role will insurance companies play in helping Californians harden their homes against fire as they rebuild? Can they make fireproofing a requirement for coverage?
Insurance companies can make recommendations or give discounts for home hardening, but it’s often challenging for them to make it a requirement to obtain coverage. Insurance companies may play a role, but home hardening and other risk-reduction measures need to be driven by residents and their communities. If only one person in a community protects their home against wildfire, it won’t make much difference if all their neighbors’ houses are on fire — collective action is necessary.
- How do large-scale disasters like fires or major hurricanes impact homeowners in less disaster-prone areas? Do these areas exist?
Major losses to insurance companies will be reflected in everyone’s premiums to some extent. Those with losses will be impacted the most (if they can get coverage at all). Insurers will also significantly adjust their pricing in high-risk areas. Those in lower-risk areas will also see premium increases, though it won’t necessarily be directly connected to recent losses.
- How is the Center for Innovation in Risk-analysis and Decision-making helping? Is it trying to find the best practices to cope with climate risks or seeking to implement best practices?
We have a number of proposed projects targeted to exactly these issues. One project explores a new insurance innovation — creating community risk pools rather than insuring through standard markets — in high-risk wildfire areas, coordinating this financing tool with community-level risk reduction projects and mitigation programs for individual homeowners.
Several projects focus on the risk-reducing benefits of “nature-based solutions” — using nature to protect human assets against disasters. This might include installing a mangrove forest or living coastline to protect a community against hurricane-caused storm surge. Nature-based solutions have a lot of potential, but not much is known about the cost-benefit balance of these projects.
Fundamentally, there are a lot of open questions about how to handle the huge increase in catastrophic events we’ve seen in the last 20 years. CIRCAD’s research will be a first step in answering those questions and motivating action at the scale needed to navigate an uncertain future.