The impact of changing wildfire risk on California's residential insurance market

Wildfire currently poses considerable risk to many California homeowners and residents, and climate change and population growth are expected to make matters worse. Insurance provides resources to rebuild after disaster strikes and, if priced appropriately, provides signals about what areas to avoid and what mitigation measures to adopt. However, price increases that reflect rising risks can also cause financial hardship for families. Therefore, it is critical to understand how the insurance market is currently performing with regard to wildfire risk and how climate change may affect this performance.

This study uses the outputs from detailed wildfire and population models and ZIP code–level data on insurance policies to examine how risk is expected to change and what the potential implications are for residential insurance markets. It focuses on two study areas—one in the Sierra foothills east of Sacramento and one in the western portion of San Bernardino County.

It finds that the insurance market currently faces challenges in the high-risk portions of the study areas. Insurer-initiated policy nonrenewal rates are higher in those parts of the study area with the highest wildfire risk, as are the market shares of the state’s residual insurance market and the more lightly regulated surplus lines market. As expected, premiums in the higher-risk areas are higher. Insurers interviewed for this study did not believe that the difference captures the full difference in risk. The California Department of Insurance, however, holds that insurers have not provided sufficient evidence that actual risk supports requested differentials between high- and low-risk properties. The study provides estimates of how much climate change will affect premiums, the market share of the admitted insurers, and other market indicators. The study found that an aggressive emission control strategy substantially reduces impacts after the middle of the 21st century. The study concludes by identifying insurance regulations (and public policies more generally) that will have an important impact on future market conditions.