Will Wildfire Risk Mitigation Requirements Change the California Insurance Industry?

A Conversation With Paul Brown

No one wants 430% increases in wildfire insurance premiums and quotes of up to $20,000 per year. So, why are California homeowners dealing with these prices?

The answer to this question is partially due to climate change. But awareness and an increasing focus on resilience and mitigation also play a role in how the insurance landscape is evolving, which is why California is the first state to implement industry-changing legislation. The California Department of Insurance will soon require insurers to offer discounts to property owners who implement wildfire safety and mitigation measures outlined in the state’s Safer From Wildfires guidelines.

In Part 1 of this episode, host Maiclaire Bolton Smith talks to Paul Brown, CoreLogic’s director of Insurance Market Strategy for Hazard and Risk Management about how insurers will need to access big data to effectively translate homeowner wildfire mitigation efforts into insurance discounts.

In This Episode:

Paul Brown:

And so nobody wants to be living for 12, 24 months in an alternative home while they decide if they want to rebuild their home in a place that’s just suffered devastating wildfires.

Maiclaire Bolton Smith:

Welcome back to Core Conversations: A CoreLogic Podcast where we tour the property market to investigate how economics, climate change, governmental policies and technology affect everyday life. I am your host, Maiclaire Bolton Smith, and I’m just as curious as you are about everything that happens in our industry.

If you don’t live in the state of California or track the minutia of natural disaster regulations, then you may not have heard the news. California has once again become the first state to implement industry-changing legislation. The California Department of Insurance will require insurers to offer discounts to property owners who implement wildfire safety and mitigation measures as outlined in the state’s Safer From Wildfire guidelines.

From insurers to homeowners, these policy changes will affect many people. To unpack what these changes mean and talk about the magnitude of this policy change, as well as the importance of hardening homes — discounts are not — we have Paul Brown, CoreLogic’s Director of Insurance Market Strategy for Hazard and Risk Management with us today. Paul, welcome to Core Conversations.

Paul Brown:

Hi, Maiclaire. Happy to be here. Thank you for inviting me.

MBS:

Yeah. Okay. So before we jump into our discussion, can you just set the stage a little bit by telling our listeners a little bit about you, your background and your role here at CoreLogic?

PB:

Yeah, sure. Happy to. So I started work in the insurance industry straight from university and was lucky enough to begin my career in Lloyd’s of London as an underwriting assistant. And that’s really where my interest in property and catastrophe risk in particular was generated. As most people, I never intended to get into this area. You just kind of end up falling into it, which is great fun. And I’ve also had some experiences with the reinsurance broker, but now I’m here at CoreLogic, as you said, Maiclaire, Director of Market Insights.

Katia Oloy:

Hi, Katia here. This is a message for all you CAT risk people. If you’re going to be at the Reinsurance Association of America Cat Risk Conference in Orlando from Feb. 27 to Mar. 2, stop by and see us. Paul will be there so you can ask him about this episode. Also, make sure to visit our booth to get some of our limited-edition catastrophe collection wildfire socks. They’re really cool. For those of you that can’t make it this time, don’t worry. We always welcome our listeners to reach out to us on social media where you could find us using the handle @CoreLogic on Facebook and LinkedIn or @CoreLogicInc on Twitter and Instagram. Now, let’s get back to Paul and Maiclaire who are about to discuss how destructive the wildfires in California have been.

MBS:

Okay. We’re going to jump into talking about legislation associated with one of the biggest catastrophes that we are seeing here across California, in particular. But throughout the U.S. and really throughout the world, wildfire is a big one. We’ll talk a little bit more about what the specific legislation entails in a bit, but can you first talk about why now? California has had wildfires forever. What has changed recently that really made California want to implement these changes right now?

PB:

Yeah, right, good question. So as you mentioned, California, the rest of the U.S., internationally and worldwide, wildfire has always been there and it’s been happening. And historically we’ve always seen fairly regular incidents of wildfire happening. But what’s really happened in more recent times is that we’ve seen experience, and particularly, insured losses have really started to peak at an all-time high. And people talk about the Hockey Stick Effect, but there’s really been a significant uptick in the trend in the last five, particularly five or six years. But even going back further than that, you can start to see a big, big trend.

And so this has really prompted many insurers and the reinsurers who sit behind them to post really large losses in 2017 and 2018, in particular coming out of California. And that’s called on them really to question their strategy, and predominantly this means that either premiums were raised, terms and conditions were tightened, or capacity has been severely reduced, particularly in California. And obviously, this has led to the difficulty of some policyholders securing adequate cover at a reasonable price. And so this really starts to grab the attention then of public bodies and the California Department of Insurance. And so they want to understand why this is happening and what the best way forward is.

MBS:

Okay. So you talked about the CDI, that’s the California Department of Insurance. They added these new regulations for insurers. So I guess the question is, what does this mean from a homeowner perspective? Is it benefiting the homeowner? You talked about pricing increases. What are these new regulations doing for homeowners? And I guess how do they benefit the insurer as well?

PB:

Yeah, sure. So I guess if we go back to sort of what underpins the California Department of Insurance and their main reason for being there, and it’s to protect consumers and ultimately ensure that rates are fair, they’re not excessive, but they’re commercially adequate in terms of keeping insurers solvent and they’re not unfairly discriminatory. And these principles really drive everything that the CDI does and are enshrined in Proposition 103 in the California Legislature. So the CDI’s aim is for a sustainable and resilient insurance market with available, affordable insurance for all consumers. At the same time, they want the market to be competitive, open and transparent and post-loss experience of 2017 and 2018, and more recent years, that we’ve seen with significant increases in acres being burned.

We’ve seen significant rises in premiums, as we’ve mentioned, and the new regulations provide homeowners with potential discounts for premiums if they take certain wildfire mitigation factors into account and improve the risk to their homes. So the CDI has stipulated in the regulations that insurers should take into account 12 mandatory mitigation factors. And insurers are able to look at non-mandatory factors as well, but they need to demonstrate that they’ve taken these factors into account in their underwriting and potentially, as we’ve mentioned, premium discounts in their calculations. And so that’s been really key. And insurers need to file these new rates with CDI before the 12 of April of this year.

KO:

It’s that time again. Grab a cup of coffee or your favorite beverage. We’re going to do the numbers in the housing market. Here’s what you need to know.

Last year finished out with continued downward pressure on home prices. After a 21-month streak of double-digit growth ended in November, prices continued to slide. The effect of rising mortgage rates on housing demand in 2022 was even more pronounced in December when annual home price growth dipped to 6.9% down from April’s high point of 20% appreciation. Only nine states registered double-digit year-over-year price increases in December, compared with a total of 48 that posted double-digit gains in April.

While mortgage rates are surely taking a toll, by December, they had begun to drift down. In early February, Freddie Mac data showed that the interest rate for 30-year, fixed rate loan was down to 6.09%. That’s a drop of almost a point from the highs seem in mid-November last year. Also, the recent tech layoffs may be affecting housing demand in some expensive metro areas. According to CoreLogic’s Home Price Insights report, Seattle and San Francisco saw significant home price deceleration in November of last year, and that trend is likely to continue. CoreLogic is forecasting a continued risk of home price declines in metropolitan areas in the Pacific Northwest. And that’s the sip. See you in the next one.

MBS:

Okay. So a couple things that I want to jump in on there. The first is I want to talk a little bit about these discounts, but something that comes to mind living here in California, I live in the Bay Area where many of these really bad fires that happened in 2017, 2018 happened just north of here. We are in the process of buying a new house and moving as well. And something that was very high on my radar is what is the wildfire risk where we are moving? I’ve heard from a number of friends and colleagues and others that they are not able to get homeowners insurance because they live in a high wildfire zone.

So now potentially with these new mitigation factors, if they can take mitigative steps to their home that may then allow them to be able to get homeowner insurance. So, I just would love your thoughts on, first of all, how do they get the data? How are they able to tell people that they’ve done these mitigative factors and is it actually going to make a difference for some of these properties that are in very high wildfire risk areas that they maybe couldn’t get insurance previously or their insurance was just so expensive because they were just in such a risky property?

PB:

Yeah, million-dollar question.

MBS:

California — it’s a $15 million question for some of these homes.

PB:

$15 million question. Yeah, so there’s a lot there. So, let’s start I guess with the piece around how this might be implemented and where the data is and how it can be used, and how we are dealing with some of that. So CDI is quite unique in terms of how it requires insurers to file rates. And it requires that insurers primarily use their own or market-wide claims data to calculate rates. Now historically, that prior to recent experience has been okay, and usually that claims experience is a minimum of 20 years claims experience needs to be used. CAT models are not allowed to be used. On top of that, attritional loss ratio that generally is calculated from those rates.

KO:

Okay, let’s address CAT modeling, which for the record, is not glamour shots for felines. It’s actually just industry speak for catastrophe modeling, which are rather complex statistical models used to help insurers and reinsurers, financial institutions, and other businesses evaluate and manage catastrophe risk from perils ranging from earthquakes and hurricanes to flood and wildfires.

PB:

So there are some significant challenges for insurers, particularly those with little or no data to fall back on or little claims data. And so the new regulations ideally require a high granularity of data about each property, which is unlikely to exist in most insurers’ databases today. But CoreLogic’s property data business, built on the back of the housing sales and mortgage business, really is ideally placed to help insurers fill some of those gaps in that data knowledge gap. We have detailed property characteristics literally for every house in the U.S., where we’ve collected surveyor and property listing data combined with unique algorithms where we calculate rebuild costs. We utilize AI, ML, alongside imagery and satellite data to give insurers the insights at the touch of a button. But even here, there’s work to do, and we have a lot of this data today, and while some of this data is available today, some of it we are compiling literally as we speak and other parts will take a little bit longer to find.

So as an example, one of the mitigation factors is clear space under decking. Now today, there’s no satellite imagery that’s going to give you that, but we are working, for example, on some of our proprietary property listing imagery to give insurers some insights into how likely it is that those properties are well-maintained and are kept clear under their deck. So some of these data points, which are fairly unique to us, combined with our catastrophe hazard expertise, we’ve been able to build a new wildfire mitigation score to complement our existing market-leading Wildfire Risk Score. And the mitigated score will take account of all those mandatory factors with inputs from us, and they’ll combine that with the hazard score and they’ll give insurers a net result that they need. They can accurately assess and fairly assess and charge an appropriate fair premium relative to that risk for each individual homeowner.

That data, going back to the data, some of those data points may need to be verified or at least input by policyholder declarations or surveys, which are fairly expensive. And we are trying to reduce some of that cost of needing to go and do house-to-house surveys by getting that data for them. Some of the mitigation efforts and some of the data pieces are not black and white either. So, data quality is a kind of a really key part of this whole regulation and the way that insurers and we are trying to deal with it. And for example, we’ve seen evidence when we’ve been out looking at houses and looking at properties for our research where Class A rubes, which is one of the typical mitigation factors where clay tiles have been installed, but they don’t have bird stops in every one of the tiles.

When you see a firestorm in full force, the embers will find, and they’re very good at finding the weakest point of any building. So if there is one or two bird stops that have not been filled, you will get embers in there and they will get into the roof space. So there’s a lot of qualitative piece that we need to put on there similar to things like debris or vegetation and roof gullies, exposed vents that don’t have the correct mesh and screens. So, there’s a lot of stuff where we see it. And another example would be non-combustible fencing attached to a house where it looks great from a first instance, but then you realize that the fence posts are actually wooden. And so, is that actually compliant with the mitigation factor or is it not? There’s a little bit of judgment there that needs to go into it, and that’s where I think some of the expertise that we have can really help and take some of that uncertainty, speed up the process and reduce the cost of insurers having to make those decisions.

KO:

I know. There’s quite a few things to dive into on that point, and I promise we’re going to get there. However, we’re going to have to continue this conversation in part two of this episode when we pick back up next week. See you there.

MBS:

All right. And thanks 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 new facts guru Katia Oloy and social media duo, Sarah Buck and Makaila Brooks. Tune in next time for another conversation.