Wildfire risks impact U.S. property insurance markets, prompting state interventions

April 30, 2024

Rising wildfire risks challenge property insurance renewals

According to a report from AP News, the increasing threat of wildfires fueled by climate change and urban expansion is creating significant challenges for property insurance markets across the United States.

This issue has been particularly highlighted by a devastating fire in Lahaina, Hawaii, which destroyed over 2,200 homes and killed 101 people.

Following this disaster, many property owners received notifications that their insurance policies would not be renewed, as their insurers reassessed the heightened risk levels.

Hawaii Insurance Commissioner Gordon Ito shared insights during a recent Wildfire Risk Forum for insurance commissioners at the National Interagency Fire Center in Boise, Idaho.

He noted: “I think most of the insurers, you know, I’m very grateful that they’re committed to the Hawaii market, so we haven’t seen wholesale withdrawals.” However, certain insurers have ceased renewing policies for wood structures in high-risk areas due to rising reinsurance costs.

State solutions to insurance challenges

The problem extends beyond Hawaii. In Colorado, following the 2021 Marshall Fire which destroyed 1,100 homes and inflicted an estimated $2 billion in damages, the state has taken proactive steps to address insurance accessibility.

Jason Lapham, deputy commissioner of the Colorado Division of Insurance, detailed state efforts, including the authorization of the Fair Access to Insurance Requirements (FAIR) Plan, set to launch in 2025.

This plan aims to provide minimal property insurance to residents unable to secure policies through private companies.

Similar initiatives have been undertaken by other states like California, Louisiana, and Florida, which have established their own state-affiliated insurers of last resort to support residents in disaster-prone areas.

Preventive measures and homeowner responsibility

Anne Cope, the chief engineer for the Insurance Institute for Business & Home Safety, emphasized the preventability of such disasters.

“This peril is a preventable peril, and it will take a will to change and do something different,” she said.

Cope demonstrated the effectiveness of fire-resistant construction by comparing two similar structures exposed to fire; the one built with fire-resistant materials suffered minimal damage.

Research underscores the importance of using fire-resistant materials and maintaining defensible space around properties to mitigate fire risks.

Efforts such as installing fire-resistant roofs and gutters and removing flammable materials from around homes can significantly reduce vulnerability.

Economic impacts of catastrophic fires

The economic repercussions of severe fires are profound and enduring.

Commissioner Ito highlighted the ongoing economic strain in Hawaii, noting substantial disruptions in tax revenue and tourism, compounded by the displacement of over 2,000 residents.

He expressed particular concern for the Lahaina survivors forced to relocate due to unaffordable housing options.

“And to me, the heartbreaking thing… there’s quite a few Lahaina survivors that cannot afford to stay and have chosen to leave the islands because of the lack of housing availability,” said Ito.

FSJA Comment

The escalating threat of wildfires poses a complex challenge for the property insurance sector, compelling states to innovate and adapt their strategies.

The establishment of state-backed insurers and the adoption of building and zoning regulations that prioritize fire resistance are critical steps toward mitigating risk and ensuring economic stability.

These measures not only protect individual property owners but also safeguard broader community interests and economic health.

The ongoing dialogue between insurers, regulators, and homeowners is essential in fostering a responsive and resilient insurance market capable of withstanding the impacts of climate change.

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