Can Wildfire Mitigation Stop the California Insurer Exodus?

A Conversation With Jamie Knippen

More and more people live in high wildfire-risk areas across the United States. In fact, according to CoreLogic’s 2023 Wildfire Risk Report, California, Colorado and Texas lead the nation in the number of at-risk homes and their total reconstruction cost value. The influx of people into these areas means that there is continued demand for insurers to provide coverage, even though climate change is increasing the potential for and the severity of these wildfires.

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How Will Property Data Help Manage the California Insurance Crisis?

Jamie Knippen:

One of the things that could occur is the adoption of loss projection rating models, which is also known as probabilistic models, and that’s because they can provide that forward-looking view, and they can assist in stabilization both of pricing and risk in the California market by reducing those large swings and overall year-to-year rate levels.

Erika Stanley:

Welcome back to part two of our miniseries about how wildfire risk is altering the insurance landscape in wildfire-prone regions of the U.S. If you missed part one, I do recommend going back and catching up on last week’s episode. To recap, we welcome Jamie Knippen, a senior product manager at CoreLogic, to talk about reducing long-term wildfire risk and what carriers and regulators can do to help. Let’s jump into it.

Maiclaire Bolton Smith:

I want to go a little bit more into… you started talking about the importance of and the value of modeling, so let’s dive in there a little bit more. So from the perspective of insurers, what is the value of using technology, whether it be risk scores or risk models, how are they different, and what’s the value of using them?

JK:

So this is really neat because we’ve actually been able to see the capabilities and impacts that these models can provide through a few different studies that we’ve done. We actually recently worked with the town of Paradise, which is where the 2018 Campfire, the most destructive fire in California history, occurred, on the study of impact of mitigation strategies on wildfire. So essentially, what we set out to do was identify what was attributable to each of the different mitigating actions, and then determine its impact. So I can definitely dive a bit more into the details if you’d like-

MBS:

Yeah.

JK:

… of what that actually looks like, and what we came out of that study learning.

MBS:

Definitely, yeah. I think let’s dive into that and really see, think of people building or mitigating their home, what really does add value. So please tell us what you learned.

JK:

Perfect, okay. And hopefully, this will reemphasize what I was talking about earlier, about both the individual mitigation actions and then that combination of what that could mean. So as we looked through the town of Paradise, one of the first things we looked at were mitigation actions at the individual homeowner, property level, and what we learned is this can meaningfully reduce risks. So in Paradise’s case, if all homeowners underwent rebuild that is recommended by IBHS, which is the Insurance Institute for Business and Home Safety, the aggregate wildfire expected loss is estimated to decrease 53% relative to pre-Camp conditions.

MBS:

Wow.

JK:

Then we took it a step further and we started looking at development patterns, so the number of structures that exist in town and where they are being rebuilt. So I talked about a little bit earlier that wildland-urban interface, which are commonly those high-risk fire zones, so building further away from those areas. And based on that rebuild and taking into account development patterns, we learned that existing risk could see a decrease of about an average loss of about 15% per property.

MBS:

Wow, that’s significant.

JK:

Completely. And then, we went into one more look at risk, and that is the surrounding of the town, so approaching it in a well-maintained buffer analysis. And if we had all five buffers well-maintained surrounding the town of Paradise, we would see aggregate expected losses down by 55%.

MBS:

Wow.

JK:

And then, putting that down to premium was something that was a focus of this study, because it does come down to the consumer, and that really gets into the different partnerships that are needed when doing studies like this. But essentially, if you add the combination of all those mitigating factors, so the individual homeowner, the rebuild in terms of development, and then the buffer surrounding a town, it could correspond to a 55% reduction in the average total premium. This doesn’t include reinsurance costs.

MBS:

Wow. This is so interesting, Jamie, because it’s something that’s so tangible. It shows the impact of something that was really devastating and how, as it’s rebuilding, what the impact could actually be. So obviously this was a really big fire, happened recently. How did we get involved in doing a study like this?

JK:

So with one of the most devastating fires that occurred in California history, we really had a vision on how to reduce the number of homes that could be at risk in the future if something like this happened again. And we looked for different partners, and ended up working with Milliman, who’s some of the best and most confident actuarial consultants who helped shape the overall study. But we also worked with other parties, that includes firefighters, who are really those experts on the ground, that need to be aware of what can be done, whilst providing information back to risk modelers like ourselves. And we also needed the buy-in from the homeowners themselves, that they want to commit to change to better mitigate and fortify both their home and their town, as well as other groups, to finally provide that expertise surrounding the impact of mitigation in both a qualitative and a quantitative way.

MBS:

Yeah, thanks for that, Jamie, because I know Milliman has been such an amazing partner with us on this, and they’ve really shared our vision of making the world a better place. And that might sound a little cliche, but it really is with this shared vision on how can we reduce the number of homes that are going to burn in the future. So, I guess too, this was really focused on let’s look at an event that’s happened. And I know I think too, when you’re trying to measure risk, a lot of times, people go to what’s happened in the past, what’s going to happen in the future, so we’ll use a historical view or a historical event. But I think one thing that we’ve learned, especially now with climate change, that insurers are really seeing that we need to not just look backwards, but we need to look forwards as well too. So how can understanding a more forward view of risk help understand what’s going to happen?

JK:

Completely. And you got it right, using loss experience rating is not forward-looking. In a lot of ways, it can be reactive, meaning that it doesn’t represent the current risk on the ground, and only reflects events that have occurred in the past. This really reduces the ability for insurers to introduce mitigation credits, and ignores the efforts that are being done or have been done to reduce wildfire risk, like our work that’s being done by our firefighters. Additionally, it doesn’t account for climate change, and within California specifically, we know that, and that they’ve made statements surrounding, that climate change has impacted wildfires.

MBS:

Yeah.

JK:

So that’s something that needs to be taken into consideration.

ES:

Since Jamie is talking about natural perils, let’s take a break and talk about what’s happening in the world of natural disasters this season. Wildfire season is in full swing, with states like California, Colorado and Texas, particularly feeling the heat. Add to that that California is currently grappling with a home insurance issue, as numerous companies are either withdrawing from the state or reducing coverage in wildfire-prone areas, and this season is one that is worth paying attention to.

CoreLogic scientists strive to provide a comprehensive view of wildfire risk and how it is evolving in the 2023 Wildfire Risk Report that was released on August 10th. Find the link in the show notes.

In other areas, hurricane season is on the radar. Multiple named storms have arrived in the Atlantic, but seasonal forecasts are trying to find the balance between El Niño and sea surface temperature influences. In the Pacific, Typhoon Doksuri, which is called Typhoon Egay in the Philippines, appeared in late July, flooding areas in China, including Beijing and parts of the Philippines. And that’s the Natural Disaster Digest.

JK:

So with all that said, and this goes back to my original point of carriers and regulators are looking for change and what can be done. And one of the things that could occur is the adoption of loss projection rating models, which is also known as probabilistic models.

MBS:

Yeah.

JK:

And that’s because they can provide that forward-looking view, and they can assist in stabilization both of pricing and risk in the California market by reducing those large swings and overall year-to-year rate levels.

MBS:

Yeah. And then, something that’s used for other perils, I know insurers who write earthquake insurance, they use probabilistic models, and there’s a lot of talk of hurricanes in Florida, they use probabilistic models. So it really is just going in that same direction hopefully of maybe using these probabilistic loss models for understanding wildfire as well too.

JK:

Completely.

MBS:

Yeah.

JK:

We completely agree.

MBS:

So everything we’ve talked about today is really focused on California, because there has been these big headlining news that these big insurance companies have ceased writing new business in California. Do we think this is going to continue to spread like wildfire across the country to different geographic areas, or is this something we’re just going to be concerned about in California?

JK:

I think it’s best to be proactive instead of reactive, so implementing some of these things in some of the states that are more complex, regardless of peril. That’s obviously tied to each individual peril, wildfire, we see it higher on the West Coast, so Oregon, Washington and California.

MBS:

Sure.

JK:

But things like severe convective storms down in Florida, these are things that need to be taken into account. Using that forward-looking approach is key for an overall understanding and efforts relating to all perils. So dependent on the area and dependent on which peril is most prevalent, I do see it spreading, but again, emphasizing that need for a proactive approach versus the reactive-

MBS:

Yeah.

JK:

… will lead to more of that stabilization throughout the market.

MBS:

Yeah, it comes back to that know your risk to help accelerate your recovery, which is really one of our tag phrases here at CoreLogic. So thanks so much, Jamie. It’s been so great to chat with you today.

JK:

Thank you, Maiclaire. I really appreciate being here.

MBS:

All right. And thank you for listening. I hope you’ve enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts, and subscribe wherever you get your podcast to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life, producer, Jessi Devenyns; editor and sound engineer, Romie Aromin; our facts guru, Erika Stanley; and social media duo, Sarah Buck and Makaila Brooks. Tune in next time for another Core Conversation.

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