Insurance Options Drop as Wildfire Risk Rises

How four U.S. states are taking action against heightened wildfire risk

Wildfires are becoming the talk of the insurance industry as catastrophic burns continue to impact communities across the United States. According to the National Oceanic and Atmospheric Administration’s (NOAA) National Center for Environmental Information, the number of acres burned in wildfires has steadily increased every year since 1983, increasing homeowners’ risk of property damage and loss along with it. 

It comes as no surprise that with the higher frequency and severity of wildfires comes higher insured losses. The Lahaina wildfire that devastated Maui in August 2023 is estimated to have caused $3.2 billion in property loss. Tack this onto damage from the nearly 50,000 other wildfires that have occurred in the U.S. this year alone, and things add up quickly.

The compounding property damage is concerning for both insurers and consumers, with many already seeing the impact more frequent burns have on the affordability and availability of homeowners insurance in wildfire-prone areas. 

Let’s explore how four different states across the U.S. are approaching the increased risk of wildfires and their strategies for protecting property owners. 

1. California works to reverse parts of Proposition 103

We thought it appropriate to start with the state that leads the nation in wildfire risk. The Golden State has made headlines on a few different occasions recently, with several large-name carriers, including State Farm and Allstate announcing their exit from California’s homeowners insurance market due to the state’s increasing wildfire risk.  

What’s Proposition 103?

In California, policy rates are set based on historical data only. This is thanks to Proposition 103, which requires insurers to price coverage based solely on what’s occurred on a property in the past. Some insurance carriers cite this restriction as a main reason for pausing business in – or completely pulling out of – the state. 

Since its approval in 1988, the proposition has been credited with saving California insurance consumers billions of dollars. However, insurers have long felt that the proposition places constraints on accurate underwriting and risk pricing by not allowing them to consider any current or future risks to a property when setting their policy rates. 

While at the time Proposition 103 may have been a pretty fair deal, it now means that insurers are unable to consider the recent and future effects of climate change when setting their rates, making it impossible to accurately price wildfire risk. 

The proposition also bars insurers from considering the pricing of reinsurance when setting rates. With reinsurance prices on the rise, California insurers are unable to recoup those costs in the price of their rates. Rather than risk insolvency, insurers who can’t handle the heat are getting out of the kitchen by restricting new business or pulling out of the state entirely, leaving thousands of California property owners without coverage. 

These individuals and businesses are then forced to either remain uninsured or seek out other options like the Californa Fair Access to Insurance Requirements (FAIR) Plan. 

What is a FAIR Plan?

A FAIR plan is a state-sponsored insurance plan intended to fill gaps for homeowners who can’t get coverage from any other source, typically due to lack of availability or affordability. 

FAIR plans were originally pitched as a “last resort” for consumers who couldn’t get coverage through any other carrier to keep them from being underinsured or uninsured. However, recent years have seen more consumers placing their policies through FAIR plans. So many so that California’s FAIR plan is now a larger insurer in the state than big-name carriers like Nationwide and Chubb. 

How is the state responding?

In September 2023, California Insurance Commissioner Ricardo Lara announced a reform altering Proposition 103 to allow insurers to consider climate change and reinsurance costs when setting their rates. The new rule includes a commitment from insurers to write no less than 85% of their market share in high wildfire-risk communities in an attempt to transition homeowners currently relying on the state’s FAIR Plan back into the market. 

Commissioner Lara has given the department until December 2024 to have the rules completed, so it remains to be seen exactly how any changes will impact the affordability and availability of homeowners insurance in the state. 

2. Colorado establishes a FAIR Plan

Colorado trails California in wildfire risk with a yearly report suggesting that more than 300,000 homes in the state are currently susceptible to wildfires. In the event of a burn, the cost to rebuild these homes could top $100 billion due in large part to the increased cost of construction materials and labor post-pandemic. 

Like California, many Colorado residents and business owners are struggling to secure coverage as insurers pull out of the state. But unlike California (and most states), Colorado didn’t have a so-called insurer of last resort, or FAIR plan until very recently.

Up until 2023, the Centennial State had no real need for an insurer of last resort. But with wildfire risks at an all-time high and policyholders losing access to affordable coverage, enacting a FAIR Plan suddenly became a top priority. 

In early 2023, state lawmakers introduced a bill to create a program to offer basic home insurance to CO homeowners who are turned away by private insurers. The bill was signed by Coloroado Governer Jared Polis in May and took affect in early August.

While he ultimately signed the plan into law, Governor Polis has expressed his concerns over enacting a FAIR plan in Colorado in the past. During a debate in 2022, Polis stated he wasn’t sold on whether creating a state-run insurance program was a good decision for Colorado homeowners. FAIR plans have their drawbacks, mainly that they’re not intended to be true insurance companies and that coverage is typically more expensive and less encompassing than the average private insurance policy. 

Polis instead urged Coloradans to prioritize risk reduction. The Governer said driving down home insurance rates can be as simple as taking down trees and clearing brush around your property. 

There’s some truth to his point. State Forest Service websites across the country offer guidance on “fire-proofing” your property to decrease the risk of wildfire damage. But no amount of pre-prepardness can fully stop a wildfire from wreaking havoc on your home, and it’s worth noting that tip No. 1 on numerous consumer-facing wildfire mitigation guides is to make sure you’re properly insured.

3. Montana considers adopting new zoning laws

Montana, another wildfire-prone state, is experiencing similar struggles to California and Colorado in that multiple carriers are halting business due to heightened wildfire risks, but experts in the Big Sky State are hoping to be proactive in decreasing the risk. A recent report published in the state emphasized the importance of statewide wildland urban interface zoning codes in minimizing the harm done by wildfires. 

What is the wildland urban interface (WUI)?

The U.S. Fire Administration defines the WUI as the zone of transition between unoccupied land and human development. It’s the line where the Arby’s meets the forest or any area where human-made structures meet undeveloped land. Because of their proximity to easily ignitable vegetation, any building that sits on or near the WUI is at greater risk for wildfire damage. 

As the number of humans in the U.S. grows, the WUI grows with them. In fact, the WUI area grows by approximately 2 million acres each year. And as the WUI increases, so too does the wildfire risk. WUI zoning codes regulate where and how new development can occur within WUI areas. These codes typically address considerations like:

• Structure density and location
• Building materials 
• Construction techniques
• Landscaping recommendations
• Emergency vehicle access
• Water access

The report states that WUI codes have proven effective for minimizing wildfire damage in risk-prone areas, with California homes built according to WUI standards 40 percent less likely to be destroyed than those built before the standards were adopted. 

Will Montana implement state-wide WUI zoning codes?

Historically, the state has resisted adopting zoning codes and ordinances, but with more people moving into the state and onto WUI land, this could represent a significant step in reducing risk and keeping citizens safe. 

The report outlines three different options for implementation, ranging from community-led to state government-led, and urges officials to act now if they don’t want to see the problem worsen. 

4. Hawaii works to prevent a future insurance crisis

While wildfires are certainly not new to the state, Hawaii has long been considered a low-risk market for insurers. In fact, things have been pretty calm regarding natural disasters in the Aloha state since Hurricane Iniki back in 1992. So when wildfires tore through Maui in August 2023, insurers were left scrambling to reassess the profitability of the market. 

While the disaster caused heavy insured losses, past market predictability means insurers aren’t feeling the squeeze as heavily in Hawaii as in more wildfire-prone states like those we’ve already discussed. Because of this, the state has a unique opportunity to get ahead of the problem before it reaches the crisis stage states like California and Colorado are finding themselves in. 

What’s Hawaii doing to get ahead of future wildfires?

Researchers in the state have already sprung into action to determine how the fire spread once it hit the area. By studying satellite footage as well as the materials used in the construction of surviving structures, experts have already found key details they can use to make recommendations for building new structures to minimize wildfire damage in the future. 

In the meantime, as communities rebuild and the full extent of the damage becomes clearer, policyholders can only hope they won’t run into the same availability problems becoming more commonplace in other states. When interviewed about the possibility, Hawaii Insurance Commisioner Gordon Ito stated he’s “keeping his fingers crossed” that insurers will remain in the market. 

In the event availability does suffer, the state may consider expanding the coverage of their insurer of last resort, the Hawaii Property Insurane Association (HPIA). In its current state, the HPIA isn’t equipped to handle a large influx of policyholders, but commissioner Ito says it’s possible for them to expand if needed. 

What does the future of wildfire risk management look like?

When it comes to wildfire risk and its effect on the affordability and availability of homeowners insurance, one thing is clear: There’s no one-and-done solution. While some states are putting faith in their FAIR plans, others are focusing more on consumer education and mitigation and others on establishing zoning codes. It’s likely the solution will come down to a combination of actions. As states continue to respond to the rising threat of wildfires, you can be sure AgentSync will be here to report on their progress. In the meantime, learn how our solution helps carriers, agencies, and MGA/MGUs create more efficiency in their producer licensing and compliance workflows.