California's urgent need for wildfire mitigation, risk models and sustainable insurance

Any number of risks can threaten a family’s or business’s financial viability, and insurance helps mitigate those risks. Without insurance, an event such as a car accident, storm or fire could wreak havoc on one’s finances.

That is why we should pay attention when major insurers withdraw from writing new insurance policies in the California as occurred earlier this summer when State Farm and Allstate, two of the nation’s largest insurers, announced they would stop issuing new policies in the state.

See also: Proposed California insurance regulatory deal fizzles

The reasons for these actions are not singular or simple. Yet, to successfully address this situation, we must begin to dig into the problem and seek solutions. At the heart of the problem in California is the state’s wildfire risk, and population and building growth in wildfire-prone areas. With an average of 8,273 wildfires per year, California is the state most prone to wildfire risk, according to data from HazardHub.

Yet, data shows that 98% of the property damage is concentrated in the 10% of the state rated by HazardHub as an F for wildfire risk. Homes and structures in these areas are 50 times more likely to suffer damage from wildfires.

Thus, a logical starting point to address the situation is to develop a more sustainable approach to wildfire mitigation, housing growth, and construction standards in those high-risk areas. A sustainable approach to the state’s insurance market is needed as well.

Sustainable insurance ensures sufficient coverage capacity to withstand catastrophic events like wildfires while maintaining the ability of the insurer to conduct business and save for the future.

Insurers regularly face the risk of not collecting enough premium surplus before a catastrophic event occurs, which could result in their insolvency. They mitigate this risk by purchasing insurance for themselves, which is known as reinsurance.

West Coast conundrum

Most every state allows insurers to consider reinsurance as an expense, to some degree or another, and thus include that in setting the price of a homeowner’s policy. However, in California, reinsurance is not an allowable expense, and insurers must cover the cost of it themselves. The problem is that the cost of reinsurance now exceeds the allowable profit margins for most carriers, leading some to pull back from the market.

As a result, the California FAIR plan, the state-established insurance pool, will see increased pressure to fill the gap.

While these conditions pose a challenge, insurers that leverage advanced technologies such as wildfire risk models, can more accurately mitigate and predict wildfire and other risks. The fact is that 90% of the homes in California are in zones with acceptable wildfire risk. The problem for insurers is in identifying them. Traditional insurance ratings use large geographical zones such as zip codes to rate risk — and classify all the properties in that district as having the same risk.

Leveraging modern technology such as AI, satellite data and geospatial information systems makes it possible to assess wildfire and other risks more accurately at the individual property level. And predictive risk models today can consider all sorts of data elements that were not readily available just a few years ago — data such as rainfall levels, vegetation burn points, and proximity to fuel load. This allows them to produce much more highly accurate and predictive risk scores — and do so at the individual property level instead of a much larger geographic area.

By utilizing advanced risk models, insurers can not only price risk more accurately but also educate consumers about their wildfire risk and provide recommendations on how to mitigate that risk. Under California’s Safer from Wildfires framework, insurers are now required to offer discounts to homeowners implementing significant wildfire mitigation measures.

These regulations are the first of their kind in the U.S. and will set a precedent for similar mandates in other states. Insurers with platforms that integrate real-time data and AI technologies will be better prepared to provide their customers with transparency and verify and discount mitigation measures.

The challenges we face in California are complex. Actions at the state and local governmental level, within the insurance industry, and at the individual homeowner level will be needed to have a collective impact to help counter wildfire and natural catastrophe risk. But working together and harnessing technology innovation will help us better mitigate the risks we face.

John Siegman co-founded HazardHub, a property risk data analytics company acquired by Guidewire, the leading technology provider to the P&C insurance industry. As a senior executive at Guidewire, he advises insurance firms on innovation and data integration, including enhancing their fire and wildfire risk models.

Any opinions expressed here are the author’s own.

Also by this contributor: Transforming fire risk assessment with accurate data & advanced models