Insurance: The Predicament of the Urban-Wildlife Interface

By Alejandro Sarmiento

Just three years ago, California experienced its most devastating wildfire season to-date. Reports from the state’s Department of Forestry and Fire Protection (FIRE) indicate that the fires decimated 1.55 million acres, with 47 confirmed fatalities, and 10,280 structures damaged or destroyed. These record-setting figures were easily trumped by that of the following year. Costly natural disasters appear to be growing in frequency, or at the very least, in magnitude. As much as this is the case for California, so too is it the case globally. Beginning in July 2019 and ending in March of the following year, Australia’s bushfire season burned over 17 million hectares, with 55 parks or reserves suffering damage to more than 99% of their lands, as reported by the Australasian Fire and Emergency Authorities Council (AFAC). The consequences of these fires are not limited to the loss of flora and displacement of people. On the contrary, Professor Charles Dickman of the University of Sydney noted that the 2019-20 bushfire season claimed more than 1 bn animals, not only wiping out rare insect species, but triggering what he calls starvation events, which prove calamitous to the entire ecosystem.

In 2019, California had the most wildfires of any state. As of 2020, the state’s 5-year average indicates 7,415 fires and 0.87 mi acres burned on an annual basis. The period from January 1 to November 8, 2020, saw 7,507 fires, just over the annual average, yet 1.49 mi acres burned, almost double the YoYo average. While the quantity of annual fires appears to converge, roughly, to a consistent equilibrium, data from the Congressional Research Service indicates that the magnitude of these fires varies significantly from year to year. To the extent that the magnitude of fires is variable by year, evidence suggests an increasing trend with respect to intensity. According to a report published by TransRe, eight of the most destructive fires in California history have occurred in the last two years. 

The 2017-20 California wildfires have proven particularly costly for homeowners in the wildlife-urban interface, a designation used to denote the meeting point between developed and wild lands. The intersection between them is referred to as the wildlife-urban intermix. According to an article in The Atlantic, “the bulk of wildfire destruction in California happens in the WUI… last year’s Camp Fire killed 85 people and eliminated more than 10,000 homes in Paradise, a town situated in the WUI.” Whereas wildfires have traditionally threatened the intermix, recent growth in the interface coupled with increasingly powerful fires has resulted in more damage to inhabited, urban areas. California homeowners, especially those in the WUI, are encouraged to retrofit their homes to hedge against the threat, but even the right roofing, ventilation, and eaves and soffits often prove insufficient conditions for safety. 

Boasting 40% growth in housing from 1990 to 2010, roughly 30% of all California housing units are located in WUI designated areas, according to the 2010 census. As fires ravage the state, homeowners are forced to make a difficult choice – rebuild or leave? The former is cost-prohibitive for many, though a 2014 study found that roughly 25% of burned homes were rebuilt within five years, with rates higher in West coast states. All said and done, the 2017 fires caused $18 bn in damage, with $13.2 bn insurance claims paid out to homeowners. Estimates indicate that 2017 saw insurers pay more than $2 for every $1 collected in premiums, erasing years of profit. The following year provided little relief — in 2018, California saw 8,527 fires and 1,893,913 acres burned, easily surpassing the former years’ record. Damages were slightly lower this time, at $16.5 bn, yet insurers were similarly burdened, with $12.5 bn in claims. 

In response to record-setting outflows paid to claimants, insurers have become unwilling to insure clients who pose what they consider to be excessive risk. From 2018 to 2019, insurer-initiated non-renewals in California increased by 36%, providing impetus for the state to issue a moratorium on non-renewals and cancellations of residential property insurance (an identical moratorium was issued the previous year), a gesture intended to protect homeowners and allow the state to “take additional steps to expand our competitive market.” In the digital age, screening insurees has become significantly easier, helping to mitigate the traditional information asymmetries that complicate the provision of fair insurance contracts. Maps which quantify the threat associated with any one location in the WUI abound, making it easy for insurers to mitigate adverse selection. The side-effect of an enhanced screening process is a more accurate assessment of risk, resulting in higher rates or a flat refusal to insure homes in certain areas at all. 

From the perspective of the insurance companies, non-renewals and cancellations make sense. Why engage in a transfer of risk that is insufficiently compensated or collateralized? If insurance companies are to continue protecting California homeowners, it follows that the transaction ought to be fair and equal. Uninsured homeowners, on the other hand, face a challenging landscape. Many simply lack the financial resources necessary to uproot their lives or to pay enormous sums in premiums. While the outlook may appear bleak for homeowners in the WUI, California’s successive moratoriums on contract non-renewals and cancellations indicate a willingness on the part of the state to cooperate with insurance companies in order to pursue a semblance of resolution. Yet a resolution may not be optimal – it has become increasingly clear that the status quo -cyclical building and rebuilding- is unsustainable.