For the first time ever, Consumers can get a Discount on Insurance for Mitigation of Wildfire Risk
Wildfire risk is becoming a big issue, for insurers as well as the insured. Wildfires caused one-third of the forest cover loss globally in 2021. In addition, financial losses from wildfires have increased by 490% from 1980 to 2018.
Further, assessing wildfire risk has become more difficult for insurers. Traditionally they have relied on historical data but climate change necessitates forward-looking models. As a result, insurers may either deny insurance or significantly increase premiums without accurate guidance and to avoid losing more, drop properties en-masse, even when properties may still be insurable.
This creates a lot of uncertainty for existing homeowners in higher fire-risk areas, raising concerns regarding consumer rights. Specifically, homeowners feel insurance companies should give them the opportunity to help mitigate or take action to reduce their property risk in exchange for the insurer reducing the skyrocketing prices of insurance — e.g., reduction in premium.
In response, the State of California has recently begun enforcing the nation’s first wildfire safety regulation to help make the cost of insurance more manageable. This rule requires insurance companies to provide wildfire risk scores to the insured with an explanation for any premium surcharge and also allows the insured to appeal the score assigned to their home. It is also the first regulation in the United States that requires insurance companies to provide discounts for personal and community-level actions that can be taken to mitigate the risk of wildfire (based on the “Safer from Wildfires” framework).
In this context, access to accurate property-specific wildfire risk data, as well as the underlying factors driving that risk, is critical. These factors can include a large number of environmental and structural variables, such as slope or roof type, which vary according to each data provider. Availability of this data would allow risk-differentiated insurance pricing and enable a quantifiable reduction in premium if the risk factors, and subsequently total risk score, were to be reduced.
For example, if the wildfire risk of a property is high and driven mostly by wind, then installing enclosed eaves as recommended by the “Safer from Wildfires” framework could lower the damage probability for the home due to wind. As a result, the property could be underwritten safely at a lower premium, resulting in a positive outcome for both the insurer and homeowner. Without a data-driven approach to understanding the components of fire risk that can be mitigated, consumers and insurers have no insight to direct their actions. They require more comprehensive analytics related to wildfire risk with transparency into the underlying drivers of that risk, which does not exist in the market today.
The good news is that with the recent explosion of earth monitoring data in the last few years, it’s now possible to develop these types of analytics and Terrafuse has introduced a solution. For example, Terrafuse provides an aggregate wildfire risk score for each property that tells an insurance company- will this burn down or not and what should the price of the risk be? Terrafuse also provides that score broken down into components, including mitigable factors that an insured can take action upon. This would allow consumers to credibly demonstrate if they are able to reduce certain risk factors and whether or not a premium discount is fair.
This data would be useful to both consumers and insurers. Consumers receive adequate protection at a fair price. Insurers can better manage wildfire exposure and ultimately provide a better service to consumers. In what follows, we show the value of this data in two different ways for the insurers as well as the insured.
