Wildfire Modeling

On March 30, the California Department of Insurance (CDI) will conduct prenotice public discussions regarding a proposed regulation requiring consideration of property-level and community-level wildfire risk mitigation in rating plans and risk models. The purpose of these discussions are to provide interested and affected persons an opportunity to present statements or comments regarding the contemplated regulation changes.

Insurers want to use catastrophe models to help predict wildfire risk when rating in high-risk areas. Currently, California is one of only three states that does not allow insurers to use catastrophe modeling to predict wildfire risk. Insurers must rely on a modeling method that uses historical data over a 20-year period. A ratemaking process that uses a historical average does not consider the “new normal” of California’s wildfire reality. California has always been a fire prone state, however, in recent years we have seen wildfires amplified by a number of factors including, climate change, forest mismanagement, and residential expansion into the Wildland Urban Interface (WUI). Three of the largest wildfires in California history were recorded in 2020 alone.

According to Michael Young, a vice president of model product management for RMS, historical modeling does not give an accurate picture of future potential wildfire losses. Adjusted for inflation, annual average wildfire losses were:

  • $3.7 billion from 2011 to 2018.
  • $600 million from 1991 to 2010.
  • $100 million from 1964 to 1990.

Allowing the use of “cat” models in ratemaking would give insurers more information to use when they are determining risk. Cat models simulate real world events using data such as, topography, vegetation type, and the wind conditions of a certain area. Having this information gives insurers a better picture when they are setting rates for their customers, allowing them to use a more surgical approach when determining how much risk they are willing to take on. California currently allows cat models for use in earthquake simulations. The conversation around these models will be ongoing as more research will be needed to understand their complexity.

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