On September 22, 2022, the House Committee on Financial Services held a hearing, “State of Emergency: Examining the Impact of Growing Wildfire Risk on the Insurance Market,” providing a glimpse into ongoing efforts to reduce wildfire risk, with a focus on California. The discussion included evaluations of today’s environment and how insurance markets identify, mitigate and price risk. The hearing’s witnesses included representatives from academia, insurance associations and intermediaries, alongside Ricardo Lara, California’s insurance commissioner.
While insurance companies operate from a unique perspective, the role of insurance in identifying risk provides policyholders, developers and other businesses with insight into risk-reduction strategies that guide decision-making. Below are highlights from the hearing that discuss defensible space, home hardening and homeowner incentives. Members of Congress expressed interest in wildfire education, firm competitiveness and industry pricing.
Risk reduction
Given that insurance pricing and availability correlate with risk, strategies to reduce risk played a prominent role in the hearing. Witnesses emphasized the significance of homeowner participation in maintaining defensible space and carrying out risk-reduction improvements. Roy Wright, president & CEO of the Insurance Institute for Business and Home Safety, stated that embers are often responsible for igniting homes rather than live flames, and that eliminating flammable material within 5 feet of a structure is critical to reducing risk. He noted that defensible space reduces a home’s potential to become an amplifier of wildfire, and prevention can be bolstered by improving roofs, windows and venting.
While maintaining defensible space and participating in structural improvements may be costly, insurance companies following commissioner Lara’s recently introduced wildfire safety regulation expected to become law this year, will provide policyholders discounts to reward efforts to reduce their risk profile. Lara noted that it is in the best interest of insurance providers to incentivize preventative measures that increase resilience, as every dollar invested generates a $5 to $7 return on avoided losses.
Insurance availability and pricing
According to Wright, despite continuous efforts by California to reduce the potential for wildfires, their occurrence and frequency are expected to increase. Ranking Member French Hill (R-AR-2) emphasized that California has 4.5 million homes at risk of wildfire, three times more than the second-highest state. Yet, with so many homes at risk, insurance options remain slim. Amy Bach, executive director of United Policyholders, stated her company used to help people find the best policy for their environment, but now is limited to finding any available option for homeowners.
The lack of policy options was attributed to two areas, uninsurable risk and trend concerns. Frazier stated that California does not allow for location-based pricing, and insurers cannot charge extra if they are willing to participate in higher-risk markets, while Bach noted that insurers become concerned following a series of environmental disasters, leading them to leave markets.
For many businesses, increased risks correlate with increased prices. Rex Frazier, president of the Personal Insurance Federation of California, noted that shifts in wind patterns and rain seasons increased the chance of wildfire, and he emphasized that insurance companies must be able to adjust pricing to accommodate changing risk profiles. He emphasized that the state must allow climate science to be used in rate filings, as the state currently does not allow location-based pricing. Wright noted that, as the risk profile in the state changes, insurers would meet consumers on pricing. While California works to increase consumer access to insurance, risk reduction and market-based pricing will loom large for insurance providers.
As California works to incentivize communities to participate in wildfire mitigation, the state has looked toward federal funds to assist in risk-reduction efforts. Matthew Auer, dean of the University of Georgia’s School of Public and International Affairs, noted California’s use of FEMA’s Fire Management Assistance Grant in a pilot program that covers up to 75% of mitigation project costs. The state matches 25% of the funding to conduct projects in selected communities. The pilot program assists communities with high levels of the following: individuals over 65, individuals with limited English proficiency, poverty, disabilities and lack of transportation options. The program aims to help insurance companies reenter markets, and has led to calls for Congress to increase funding for these programs to allow for their expansion.
Education
While many of the congressional representatives’ questions focused on the insurance market, Emanual Cleaver (D-MO-5), chair of the subcommittee on Housing, Community Development and Insurance, expressed concern about the condition of wildfire education in the United States, noting he has not seen a wildfire prevention campaign like Smokey Bear in years. Representatives of the insurance industry noted that education on fire-wise communities, high-risk areas for potential homebuyers and new-construction specifications are essential to reducing risk.
Despite the political differences visible throughout the hearing, Ranking Member Hill and Chairman Cleaver shared mutual concerns about the development of homes in high-risk areas. Hill stated that part of the role of insurance markets is to educate mayors and developers on whether it is wise to build in an area. The regulation proposed by commissioner Lara mentioned previously intends to educate consumers by requiring insurance companies to provide them with property-risk scores, informing them of the reasoning behind their scores and allowing for score appeals. Community education and consumers’ decisions will play a critical role in preventing the spread of wildfires.
Conclusion
As communities work to reduce wildfire ignition and spread, the tree care industry’s role in creating and maintaining defensible space will prove valuable to all parties. Many changes are in the pipeline in California, including the release of a new CAL-FIRE risk map addressing land-use changes, recent fire history and wind-event data. As insurance companies, state regulators, homeowners and businesses work to mitigate threats, staying informed on these topics will allow our industry to best serve community needs.
Josh Leonard is a legislative assistant with Ulman Public Policy, TCIA’s Washington, D.C.-based advocacy and lobbying partner.
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