Spring 2020 Journal: Community Risk Sharing Organizations for Wildfire Insurance in California

This article is the fifth article featured in our Spring 2020 journal. For the complete journal, please see the “Journal Archive” tab above.

by Sadie Frank

Edited by: Dylan Crary, Eli Kahn, Edwin Sun, and William Wilcox

This paper proposes a new policy to ensure the continued viability of homeowners insurance markets in high-fire-risk California communities. By addressing risk mitigation and the limitations of public insurance provision, this policy provides community-level private insurance in exchange for proactive risk reduction. 

The 2018 wildfire season was the most destructive wildfire season in the history of California [1]. In a heavily wooded state already known for its forestry and fire management, the Mendocino Complex Fire became the largest wildfire in state history. Beginning in August of 2018, the Mendocino Complex Fire lasted several weeks and burned 283,800 acres of land, roughly the size of the city of Los Angeles. Just two months later the Camp Fire swept through northern California, becoming the deadliest fire incident recorded in the United States in a hundred years and completely destroying the town of Paradise, a small mountain community of mostly seniors.

While wildfires are a fairly well understood natural phenomenon, the scale of the current wildfire crisis in California is attributable to climate change [2]. Vicious cycles of drought dry out forests, and subsequent extreme rainfall causes rapid undergrowth accumulation. Together, these two changes have fed more intense and longer-burning fires. Already, the Center for Climate and Energy Solutions reports that “large wildfires in the United States burn more than twice the area they did in 1970, and the average wildfire season is 78 days longer” [3]. Climate scientists project that this trend will continue as California becomes hotter and drier, regardless of actions taken to reduce emissions (and given the current federal political landscape, a healthy dose of pessimism is reasonable).

California is already dealing with the immediate effects of the climate crisis and has the opportunity to innovate in regard to adaptation policies. One of the most underdeveloped and important areas of adaptation policy, especially pertaining to wildfires, is homeowners insurance. This paper investigates changes to homeowners insurance in response to the wildfire crisis, draws evidence from other natural disaster case studies for context and finally proposes an adaptation strategy designed to offer ‘co-benefits’ by encouraging responsible communal land use in exchange for continued coverage in fire-prone areas. This proposal is intended to augment Sec 2(a) of California State Senate Bill 30, specifically in answer to question (5): Can we develop rating systems based on community risk factors to climate events, and use insurance incentives to make a community more resilient [4]?

It is crucial to note that there is a fundamental practical and ethical tension with all climate adaptation policies between so-called “managed retreat” and in situ adaptation. Managed retreat policies involve pulling back from disaster prone areas and leaving them entirely uninhabited, while in situ adaptation policies support resilience building in place. This paper is specifically focused on in situ adaptation, due to equity imperatives and feasibility considerations. Many of the homeowners and communities that are the most vulnerable to catastrophic wildfires, and the most at risk of losing their insurance, are lower income and more rural, with limited resources to move [5]. Further, as insurance holding is a mortgage requirement, homeowners who want to move but are not covered by insurance are unable to do so. High-income homeowners have the ability to afford insurance premium hikes, and therefore relocate more easily in addition to already being better positioned to navigate California’s high cost of housing. Given the current state of housing in California, policymakers have a responsibility to help low-income homeowners participate in insurance markets that can protect their current homes and increase their capacity for resilience. Further, homeowners and communities do have a degree of control over their wildfire risk- thus, this policy argues that with proactive land management and stakeholder support, it is possible to keep inhabiting California’s wildfire vulnerable communities.

Recent Mega-Fires Have Disrupted the Homeowners Insurance Market

In California, prior to the past few years of devastating wildfires, standard homeowners insurance policies did provide coverage for wildfires, even in high-risk areas. Both public and private insurers covered structures in high-risk fire zones via standard market-based insurance policies (high-risk is defined by CalFire according to multiple criteria, including vegetation and topography that makes communities especially fireprone). However, as private insurers took stock of the massive losses incurred across the state from the recent wildfire seasons, they began reducing coverage in riskier areas. According to the California Department of Insurance, the lost property insurance claims from the 2018 fire season totaled $9 billion. As wildfires grew more severe from 2015-2016, there was a 15 percent increase in consumers complaining of being dropped by their insurance in high-risk counties, totaling 10,000 dropped policies [6]. In Paradise, the community destroyed by the Camp Fire, one small insurer was driven into insolvency by the magnitude of losses, and was taken over by the state [7].

As private coverage has been reduced, many homeowners have turned to the “insurance of last resort,” the California State insurance provider FAIR California. Created from a paid pool of all homeowner insurance companies writing plans in the state, FAIR California provides insurance for homeowners who are unable to find coverage from fire loss. This fund has been mandated by the state government since 1968 [8]. As standard insurance becomes less available however, homeowners unable to find private insurance place pressure on alternative forms of housing insurance like Cal FAIR, a program never intended to replace large portions of the private homeowner insurance market. The California State government has passed legislation to begin to address the crisis, passing SB-30 (Climate Change and Insurance) in 2017 with the goal of creating mitigation incentives and providing climate risk management for communities and infrastructure projects [9]. However, given the emergence and scale of the wildfire and climate crisis, there is much work to be done to protect vulnerable communities. It is helpful to compare the current California context to other recent natural disasters that have revealed structural deficiencies in homeowner insurance markets elsewhere in the United States.

Hurricane Harvey Demonstrates the Pitfalls of Overreliance on Public Disaster Insurance

Hurricane Harvey is tied with Katrina as the costliest cyclone in US history. It is estimated that up to 30 percent of Harris County was submerged during the storm’s landfall. Because flood insurance in Houston was considered a private insurance “add-on,” many homeowners opted out of coverage. The Associated Press reported that up to 80 percent of affected homes during Hurricane Harvey did not have adequate private homeowners insurance. However, all homeowners in Houston were eligible for the National Flood Insurance Program or NFIP, administered through FEMA, a program that mandates public coverage of homes in a 100-year floodplain [10].

Without private flood insurance, most homeowners drew on the NFIP program heavily. By the end of the fiscal year, 16 billion dollars of total payments were spread among 252,925 claims [11]. However, the disparities in economic outcomes were stark. According to the current director of FEMA, Peter Gaynor, “the average payout in [federal] emergency disaster assistance was about $3,000…while the average private insurance payout was $117,000” [12]. This points to the stress placed on federal and state agencies to respond to disaster funding needs and the inadequacy of public recovery funds in dealing with the increasing rate of disasters. It also raises equity concerns for insurance access, as homeowners who could afford private insurance “add-ons” were left with higher pay-outs than those who had to rely on government assistance. That equity concern, and the stark differential outcomes in insurance provision mirror the California wildfire context. As noted previously, the destruction of the town of Paradise in 2018 impacted some of the most vulnerable and least recovery-equipped, including low-income senior citizens.

The Hurricane Harvey case study demonstrates that robust non-governmental insurance provision is a critical component in recovery outcomes for disaster impacted communities. It is attractive for private insurance companies to pull out of markets when their risk becomes too high, as their continued existence depends on maintaining pools to cover claims and generate profits. However, this leaves homeowners and communities exposed to the risk of uncompensated, catastrophic loss. Additionally, as shown in both the Hurricane Harvey and current California context, public insurance provision does not offer the same level of coverage as private standard plans. Further, public provision is subject to other risks including political leadership changes and budgetary gaps. Therefore, alternative mechanisms are needed to stabilize the balance between market incentives, public regulation, and the private needs of property owners.

Risk Mitigation is Key to Developing Comprehensive Insurance Provision

The insurance marketplace functions as a delicate balance of incentives and risk management. Insurance companies provide quotes for policy seekers based on varying levels of risk analysis, usually charging more for those judged as ‘riskier’ policy seekers based on whatever criterion they are using. This implicitly rewards risk mitigating behavior (or in adverse circumstances can fuel discrimination) and provides stability for insurance companies to offer coverage with baseline security that their losses will be recovered. The risk analysis undertaken by insurance companies is usually based on a complex calculus of probabilistic data modeling of observed and historical trends in weather, and applicant characteristics, as well as other variables [13]. In the case of wildfires, climate change is increasingly throwing these models out of balance for homeowners, as more frequent extreme weather occurrences increase systemic risk. Decreasing risk through prevention activities, including individual and community risk management strategies can aid in stabilizing insurance markets and incentivize positive mitigation behavior.

The Policy Opportunity: Incentivizing Proactive Private Risk Mitigation in the Wildland Urban Interface

Wildfires are one area of climate change where humans can mitigate disaster risk through local resilience activities. According to the US National Park Service, up to 85 percent of wildfires are caused by human activity, whether from carelessness or merely accidental ignition through sparks [14]. While climate change and climatological conditions increase the risk of this ignition through soil dryness, undergrowth thickness, and vegetation topography, active forest and land use management practices can greatly reduce the risk of ignition and catastrophic property damage. These practices include prescribed burns, controlled fires started to clear underbrush and encourage healthy tree growth, as well as defensible space management. Defensible space management includes land use strategies to put physical buffers between property lines and ignition sources. There is robust evidence to support the effectiveness of these and similar strategies [15]. While the past few decades have seen increased resistance to prescribed burns due to air quality issues, the need for active community-level land and forest management has come into sharp focus as Californians increasingly push into the wildland-urban interface (WUI).  Communities in the WUI are left more vulnerable to opportunities for starting fires and their devastating impacts. Recent research finds that “as home ignitions are primarily determined by conditions on private property, the principal authority, and thus, primary responsibility for preventing WUI home destruction lies with homeowners rather than public land managers”[16]. This recognition of the need for private land management in the WUI, coupled with the risk implications of insurance marketplace changes, presents an opportunity for proactive adaptation policy.

California’s Opportunity: SB-30

In 2018, the California State Legislature passed Senate Bill 30 (SB-30). Introduced by Ricardo Lara, SB-30 “require[s] the Insurance Commissioner to convene a working group to identify, assess, and recommend risk transfer market mechanisms that, among other things, promote investment in natural infrastructure to reduce the risks of climate change related to catastrophic events, create incentives for investment in natural infrastructure to reduce risks to communities, and provide mitigation incentives for private investment in natural lands to lessen exposure and reduce climate risks to public safety, property, utilities, and infrastructure” [17]. This working group is intended to address five key questions related to the above goals, including answering the question: Can we develop rating systems based on community risk factors to climate events, and use insurance incentives to make a community more resilient? This policy proposal addresses the latter part of that question, and offers a model for insurance incentives to build community resilience.

Community Risk Sharing Organizations for Wildfire Insurance

This proposal suggests the boundaries and structure of Community Risk Sharing Organizations (CRSOs) in the California WUI. CRSOs would consist of two to ten privately owned land parcels that share a border with each other in an “at-risk” fire community, as designated by CalFire (see map in appendix), that enter into a CRSO agreement. These communities would meet the criteria for CRSO incorporation if they:

  • Are geographically eligible as an at-risk community on non-federal land
  • Have experienced significantly reduced homeowners insurance coverage availability, or increased premiums in the last five years from wildfires, as determined by an initial Insurance Commissioner’s Office pilot research project and community surveying.

CRSO management responsibilities would include proactive land use strategies for fire reduction at the community level. This could include, among other options:

  • Comprehensive defensible space development
  • Residential infrastructure hardening
  • Evacuation route planning and maintenance
  • Compliance/assistance with prescribed burns with local firefighter authorities

In exchange for undertaking these activities the homes within these CRSO’s would be eligible for state backed private insurance to gain coverage at the community level. Homeowner’s compliance would be monitored through partnerships with local housing authorities or CERT’s (Community Emergency Response Teams, usually loosely organized local emergency management coalitions). Individual homeowners would be assessed an annual rate based on their property size, but coverage would be aggregated at the community level based on the number of member households. CRSO members would still pay premiums, which would be stabilized at current levels in return for active CRSO membership. In this way, CRSOs would provide block coverage and continual affordable rates for homeowners by incentivizing communal or ‘co-benefits’ from proactive land use management and risk sharing among neighbors. 

Pilot Project Funding

The FAIR insurance plan in California sets a precedent for this type of public-private funding mechanism [18]. Functioning as a public-private partnership, the State will match contributions from the private premiums paid from each CRSO to reduce the upfront risk to insurance companies and provide state guaranteed funds. The State will manage all CRSO applications through the California Insurance Commision, and recommend approved applications to private insurance partners that are currently already vetted and regulated through the state. After an initial five year assessment of project success, the State will phase down matching contributions, under the assumption that CRSOs will have generated a substantial pool of existing premiums and that the CRSO fire mitigation strategies will have proved successful at property protection.

Financial Feasibility

Community risk sharing for disaster resiliency is in its infancy, with few comparable programs to assess. According to the Availability and Affordability of Wildfire Report published by the California Department of Insurance in 2018, “Most insurers do not take into consideration wildfire mitigation conducted by homeowners or the community, either for underwriting or for offering a premium credit for mitigation efforts” [19]. Further, community mitigation efforts are currently not factored into wildfire risk models at all. The CRSO pilot program will offer a pathway to test the inclusion of such activities in insurance risk analysis.

Assumptions of financial feasibility model:

  • The current average annual premium of homeowners insurance in California is $98620. This is the baseline the CRSO program is targeted at maintaining for individual homeowners.
  • The California Department of Insurance has reported that during the 2018 fire season “homeowners who were paying an annual premium of $800-$1,000 saw increases to as high as $2,500-$5,000”, or greater than 300 percent [21]. This is taken to be the comparison range for homeowners without CRSO management.
  • The Archuleta County coordinator for Wildfire Adapted Partnerships reports that a 150-foot defensive space radius around a house can typically cost less than $2,500 [22]. This is taken to be the baseline cost to homeowners of proactive fire risk management.

Based on these assumptions, CRSO membership is projected to save homeowners between $17,470 and $4,970 over the course of the pilot program.

Challenges to Project Success

This proposal hopes to reduce the risk of adverse social incentives through social capital and community pressure. By setting insurance coverage at the community level, neighbors are equally responsible for prevention activities and more incentivized to participate in land management. However, any community-level proposal is vulnerable to bad actors and the tragedy of the commons. The risk of free-riding may require active implementation monitoring by local housing authorities. Other policy challenges include the continued engagement of private insurers, who face strong financial pressure to pull out of fire risk markets in the face of devastating wildfire. The negotiation process between the DOI and the private insurers prior to pilot launch is designed to ensure that insurance companies have adequate incentives to participate, and that the state has a clear understanding of how premiums are assessed to prevent extortionate rates. Ensuring transparency and collaboration in assessing metrics, matched funding, and eligibility criteria will therefore be critical to project success.

Monitoring and Enforcement of Pilot Program

This policy is expected to take the form of a pilot under the working group provision of SB-30. To assess the scalability and success of such a program, rigorous enforcement and monitoring will be required. Qualitative interviews with CRSO participants will be collected periodically to ascertain attitudes about the program. Partners in local housing and emergency management services will monitor and assess the land use management, and provide guidance and training to CRSO members in fire reduction strategies. The insurance companies will be invited to develop quality assurance standards alongside emergency management officials to ensure continual buy in and agreement between public and private stakeholders.

Conclusion: Developing Innovative Risk Mitigation is Crucial for a Climate-Changed California

Proactive risk mitigation strategies can reduce the social and economic losses from climate induced disasters like wildfire. The insurance industry is an important locus of adaptation policy, which is already facing pressures due to increased systemic risk. As the case study of flood insurance post Hurricane Harvey illustrates, the traditional roles of public and private insurance programs may not adequately address the equity concerns, overall needs and scope of a climate changed future. New public-private wildfire insurance programs at the community level would address the need to risk share among neighbors, as well as the need to design policies that provide climate ‘co-benefits.’ This allows at-risk communities to access homeowners insurance by undertaking housing and land management activities that protect both their homes and their communities from the devastating effects of wildfire.

Sadie Frank is a second-year Master of Development Practice student at the University of California, Berkeley.



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  4. California Legislative Information. Bill Text Senate Bill No.30. https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB30
  5. Kasler, Dale and Lillis, Ryan. 2018. Paradise Will Rise from the Ashes After Camp Fire. Is that a good idea? The Sacramento Bee. https://www.sacbee.com/news/california/fires/article222900130.html
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