The ongoing wildfires in southern California have highlighted this hazard and the tragic results brought international attention. The damage estimates will top $50 billion dollars, making this the second most costly event behind Hurricane Katrina. Katrina affected four states, these fires affected one county.
Wildfires were previously called forest fires, and they were a rural event. As time went past the fires were now burning in the wildland urban interface. This was where the forest met the developed areas. It was still considered to be a more remote area of impact.
Fires recently have moved into decidedly urban environments.
Lahaina, Hawaii, 2023 — A wildfire-started conflagration that killed 98 people and damaged or destroyed over 2,200 structures
Marshall Fire, Colorado, 2021 — A fire that started conflagrations in Louisville and Superior, Colorado, killing two people and destroying 1,084 structures
Almeda Drive Fire, Oregon, 2020 — A fire that destroyed 2,600 homes and killed three people in the communities of Phoenix and Talent
Camp Fire, California, 2018 — A fire that killed 85 people and destroyed 18,804 buildings in Paradise, California
Gatlinburg and Pigeon Forge, Tennessee, 2016 — A fire that killed 14 people and destroyed 2,460 structures
These events have losses similar to the Great Chicago Fire of 1871, the 1906 San Francisco Fire, and the Great Fire in Baltimore in 1904. These conflagrations gave rise to the Public Protection Class tool used by insurance companies. This rating scale of 1- 10 with 1 being the best measures the fire department’s ability to resist a major urban conflagration. It focuses on the ability of the fire department to control fires within a given area using conventional apparatus, staffing, communication, and water supplies. LA City FD is ISO 1, and LA County FD is ISO 2. The fire department and water supply were judged to be above average by the PPC scores.
Property underwriting evaluates a single building with adjacent exposures. The assumption is a single fire. The wildfires do not behave in this predictable manner. There can be dozens of fires at the same time with wind driven brands starting fires well in advance of the front line. Traditional firefighting methods, traditional water supply calculations and traditional insurance underwriting all fail to manage this situation. This is fueling the crisis status of California property insurance.
This trend indicates that the traditional methods used to control conflagration are simply not effective. Whether the issues are climate change, space lasers or just bad luck, the trend cannot be ignored. Unlike hurricane events where flooding is often not a covered peril for property insurance, these events are covered by property insurance.
Our July 2023 article on Wildfires, indicated the increased use of wildfire hazard scores. This is a function of fuel type and quantity, slope, and weather conditions. The biggest variable in this process is weather, so the computer models run thousands of simulations to adjust for weather variability. This process is documented in FEMA National Risk Index. This index was updated in March 2023.
Various groups have built upon this methodology to create brushfire scores for properties. Using overhead images and machine learning and artificial intelligence to interpret the slope, vegetation, distance to structures and exterior construction of the building generate a score. This is the foundation of many cancellation notices. While this shows immediate action, it does not address the underlying issue. You cannot cancel your way to profitability. To make money, insurers have to write business and transfer risk.
There are solutions to this problem. There are long-established standards for making properties more resistant to wildfire. They involve the use of non combustible building materials on the exterior of structures, use of windows that resist fire damage, managing the space around the building to limit fuel near the building and improving ember resistance to all exterior ventilation openings. The rebuilding of the fire damaged areas would be immediately improved if building codes were updated. Past experience shows that getting major changes to the building code is an exceedingly long process. Past fire experiences in California have not prompted this type of change in code language. Pressure from insurers has been more effective in moving the needle towards a fire safe structure.
Community planning that increases distances between buildings, adds defensible breaks within the community would also reduce the conflagration hazard. Using more land as public spaces that create separation and firebreaks is also an effective tool for resilience. The cost is lower density of taxable structures, so this is a non-starter.
Personal planning to use static water sources such as pools or water impoundment systems for rainwater and greywater would be advantageous for individual owners to upgrade their fire protection with exposure sprinkler systems supplied from these water supplies. This would take strain off of the municipal water supply. Some insurers are advocating for these improvements via lower deductibles and being an available market for high value homes.
The wildfire hazard has evolved from a Smokey the Bear environment to Malibu. The genie is out of the bottle and unless targeted actions are taken to reduce the risks, these events will repeat. Insurance in its traditional form and structure cannot support the loss dollars these events create. It is not probable that the banking world will allow a wildfire exclusion for property policies. This would shift the risk to the mortgage holders. That is untenable. Insurers simply exiting the marketplace is untenable. The exposure must change and that means building codes, community planning and individual risk reduction efforts will be needed.
Watch as the reviews of this event are conducted. Each group involved will suggest they need more of their product. More fire department resources, more water resources, and more insurance responses such as high rates and deductibles. Each group wants to keep using the tools they have. A wise man once told me “If you only have a hammer, everything looks like a nail.” Swinging each group’s hammer will not solve this problem.
We have a short memory for tragedy. The speed at which new tragedies occur make the last one forgettable. Unless we acknowledge that wildfire is not a California hazard and is represented across the nation, it will be playing “whack-a-mole” with this exposure.
The Driehaus Difference
We have observed underwriting decisions based on wildfire exposure creeping into the local market. We monitor these underwriting trends and use that knowledge to help our clients find the right markets for their property insurance. Reach out to use at 513-977-6860 or use any of the contact tools on our website, www.driehausins.com We want to be your insurance provider.
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