Resources for the Future: 'Insurance Availability and Affordability under Increasing Wildfire Risk in California'

WASHINGTON, Jan. 7 -- Resources for the Future issued the following issue brief (No. 22-09) on Nov. 30, 2022, entitled "Insurance Availability and Affordability under Increasing Wildfire Risk in California."

The brief was written by Yanjun (Penny) Liao, Margaret A. Walls, Matthew Wibbenmeyer and Sophie Pesek.

Here are excerpts:

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5. Discussion and Conclusion

Insurance is an important tool for managing risks and recovering from disasters. However, in California, concern is growing over insurance availability and affordability, especially in areas that have experienced severe wildfires. In recent years, wildfires have increased in frequency and severity--15 of the top 20 fires in the state's history, in terms of structure damage, have occurred since 2015. If this trend holds, and population in the WUI continues to grow, these concerns about insurance coverage will increase.

We summarized CDI data on insurance nonrenewals, enrollment in the state's FAIR Plan (generally considered insurance of last resort), and insurance premiums by ZIP code to analyze trends over time in availability and affordability of insurance and how those trends vary by a measure of wildfire risk. We also combined these data with four demographic measures from CalEnviroScreen, the state's mapping tool that helps identify disadvantaged communities. Specifically, we analyzed how insurance nonrenewals initiated by insurance companies vary across ZIP codes based on poverty rates, percent people of color in the population, housing burden, and a composite index based on eight population characteristics that include health outcomes, linguistic isolation, and unemployment.

Our key findings are as follows:

* Insurer-initiated nonrenewal--the share of the total number of policies in a ZIP code in a given year that are not renewed by insurance companies--is highly correlated with wildfire risk. Areas with the highest wildfire risk have the highest nonrenewal rates.

* Nonrenewal rates more than doubled in 2019 in ZIP codes with the highest wildfire risk.

* Although only 10.5 percent of policies across all the highest-risk ZIP codes were not renewed in 2019, 11 ZIP codes had nonrenewal rates above 30 percent.

* The market share of FAIR Plan policies has increased significantly since about 2010 in ZIP codes with the highest wildfire risk while remaining unchanged in other ZIP codes.

* Average insurance premiums have stayed roughly constant or declined, in inflation-adjusted terms, since about 2008 in all ZIP codes except those in the highest wildfire risk category, where they have increased by approximately 14 percent.

* FAIR Plan premiums have risen slightly since 2008 in all ZIP codes, but the greatest increase is for those ZIP codes in the highest-risk category.

* The ZIP code nonrenewal rate is not positively correlated with four measures of social vulnerability that we analyzed, save for some evidence that the rate is higher for high-risk ZIP codes with a greater share of the population below two times the federal poverty line.

* Our maps identify a few ZIP code hot spots where some measures of social vulnerability are high and nonrenewals are also high. Further analysis of exactly who is being harmed by nonrenewals, and other changes in insurance markets, seems in order.

Overall, our analysis confirms some of the problems in California that have been widely discussed in the media and elsewhere in recent years. By looking systematically at nonrenewal rates by a measure of wildfire risk, we document that areas with the highest risks have higher nonrenewals, FAIR Plan enrollments, and insurance premiums. Although the overall average rate of nonrenewals--10.5 percent in 2019--may not seem excessive, some ZIP codes have a significantly higher rate, indicating some hot spots of insurance problems.

Our analysis has a few important limitations. First, we analyzed nonrenewals but not other possible changes in insurance, such as higher deductibles and changes in coverage, including lower limits or eliminating fire coverage. We do not have data on these outcomes. Second, our data do not include 2020 and 2021, which may have seen important changes due to heavy wildfire damages in recent years and also some changes in insurance regulatory requirements in California. Third, our analysis by demographic characteristics is only suggestive of the burden of insurance on vulnerable populations. It serves to highlight which ZIP codes, as characterized by some average measures of vulnerability, may be seeing a greater share of their households losing insurance through insurer-initiated nonrenewals. Further analysis of insurance and various measures of vulnerability are needed.

California has taken a few approaches to address its insurance problems. In 2018, the legislature passed Senate Bill 824, which prohibits insurance companies from canceling or refusing to renew a policy for one year after a state of emergency is declared, if the sole reason for cancelation is that the structure was within a wildfire area. When a state of emergency is declared, CalFire provides CDI with information on fire perimeters. CDI then determines the ZIP codes that are within or adjacent to the fire perimeter and announces the one-year moratorium for them. Since the law passed, CDI has issued 24 moratoria covering multiple fires and ZIP codes.10 CDI has also taken several steps to address concerns about FAIR Plan policies. The most significant was an order adopted in September 2021 that FAIR Plan offer a more comprehensive homeowners policy--a so-called HO-3 option (similar to the private market)--that covers dwelling damage, loss of personal property, and liability. The insurers that operate FAIR Plan are fighting the new requirements in court, claiming they violate the state insurance code. In February 2022, the Los Angeles Superior Court denied FAIR Plan's request of a stay to the CDI order; FAIR Plan is appealing that decision./11

Finally, in October 2022, CDI adopted regulations requiring insurance companies to adopt rates that reflect homeowner and community wildfire mitigation activities.12 On the homeowner side, insurance companies are required to consider clearing of brush and debris, removal of combustible structures, and various building-hardening measures. On the community side, rates are required to reflect whether a community is in the National Fire Protection Association's FireWise program or on the California Board of Forestry and Fire Protection's Fire Risk Reduction Community list. These voluntary programs require communities to meet a set of best practices for local fire planning. The new regulations also require CDI approval of any wildfire risk model that an insurer uses to determine rates.

As wildfire losses in California increase, the cost of insuring homes in high-risk areas will also continue to rise, posing continuing challenges for insurers and policyholders. Nonrenewal moratoria can create stability in the short term, but they may not provide a long-term solution to California's insurance affordability and availability challenges, as insurers facing rising costs may eventually exit the market. Policies that encourage premiums to better reflect risk and also encourage activities that mitigate risk may be part of the long-run solution. However, affordability challenges will remain, and more research is needed to better understand how affordability burdens are distributed across households and what can be done to ease these for the most vulnerable households and communities.

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About the Author

Yanjun (Penny) Liao is a fellow at RFF. Her current research focuses on issues of natural disaster risk management and climate adaptation.

Margaret A. Walls is a senior fellow and director of the Climate Risks and Resilience Program at RFF. Her current research focuses on issues related to resilience and adaptation to extreme events, ecosystem services, and conservation, parks and public lands.

Matthew Wibbenmeyer is a fellow at RFF. His research seeks to understand climate impacts and climate mitigation policies related to the forest and land sectors, with a special focus on wildfire.

Sophie Pesek is a research analyst at RFF. Her current work focuses on natural disasters, the value of earth observation data, and the just transition.

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About the Org

Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. The views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors.

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The brief is posted at https://www.rff.org/documents/3636/IB_22-09.pdf