SACRAMENTO, CA – Today, associations representing insurers operating in California – the Personal Insurance Federation of California (PIFC), the American Property Casualty Insurance Association (APCIA), and the National Association of Mutual Insurance Companies (NAMIC) – released a new analysis from Milliman that finds wildfire catastrophe models would improve homeowners’ access to insurance in the face of climate-induced wildfire risk.
Currently, California is the only state requiring insurers to set total catastrophe premiums for homeowners insurance based on historical experience. Originally mandated in 1988, this overly simplistic and outdated method is unable to reliably measure the growing wildfire threat posed in California.
“Using 1988 technology in a 2022 world isn’t working for homeowners and threatens availability of homeowners’ coverage,” said Mark Sektnan, APCIA Vice President. “With climate change posing such a volatile threat to our communities, Milliman’s analysis demonstrates how the use of modern technology and tools provide a path towards giving homeowners predictability and reliability of their homeowners coverage.”
Instead of looking backwards, catastrophe (cat) models draw from fields like atmospheric science, environmental science, actuarial science, and engineering to forecast climate-induced risks. Catastrophe models are generally relied upon in other states as the best available science to measure risk for a variety of catastrophic perils such as hurricanes, floods, winter storms, earthquakes, and wildfires.
The Milliman report – Use of Catastrophe Models in California Homeowners Ratemaking Formula – illustrates comparisons between the current historical experience method and cat modeling, simulating the difference between the two models on insurance premiums and availability for homeowners in California.
Key findings include:
• Ratemaking based solely on historical experience creates situations where premiums are subject to drastic increases, whereas indications from a cat model can be smoother and offer more predictability over time.
• The historical experience method has disincentivized insurers from taking on riskier properties, as well as created an incentive and a mechanism for dropping high-risk policies in order to avoid requesting larger rate increases.
• While effective risk mitigation measures can have a significant impact on total wildfire premium setting, the difference won’t show up for many years using the historical experience methodology. Cat models allow insurers to incorporate mitigation impacts immediately and objectively, promoting more affordable insurance sooner.
“Studies such as this one are critical to advancing our understanding of the pricing of risk in our WUI communities while developing mechanisms that give residents agency to reduce their exposure to the peril of wildfire loss,” said Dave Winnacker, Fire Chief of the Moraga-Orinda Fire District. “Forward looking models that ingest an area’s ongoing investment in wildfire safety to include defensible space, home hardening, interruption of wildfire pathways, and a robust fire suppression response are needed to accelerate our progression to a fire-adapted future.”
Without the modern tools to adequately forecast and adapt to imminent climate-induced challenges, more and more Californians are at risk of losing access to insurance, especially the more than 11 million homeowners in high-risk wildfire areas. Wildfire catastrophe models could provide an answer to this burgeoning availability crisis, as underscored by Milliman’s analysis.
“The California Department of Insurance has just issued regulations allowing catastrophe models, which represent the best available science, to measure the impact of homeowners’ efforts to reduce their wildfire risk,” said Nancy Watkins, a Milliman principal and co-author of the report. “However, until insurers are also able to use this same science to measure total wildfire premiums, we would expect the current insurance availability issues to remain and potentially worsen.”
“If we want to address climate-induced challenges to insurance availability, reliability and sustainability, we need to leverage modern technology like catastrophe modeling to help reinforce homeowners’ access to insurance and let the FAIR Plan do what it was intended to do – serve as a safety net,” said Seren Taylor, PIFC senior legislative advocate. “These models allow homeowners and insurers to find common ground and work towards what are hopefully stronger and more sustainable futures.”