Wildfires Burn a Trail for Insurers

Hilary Tuttle


December 1, 2013


More than 1.2 million residential properties in the Western United States are currently located in “High” or “Very High” wildfire-risk categories, and are valued at more than $189 billion, according to the 2013 CoreLogic Wildfire Risk Report. In the “Very High” risk category alone, there are roughly 268,000 residences, accounting for a total value of more than $41 billion.

Leading the way in the “Very High” category for total potential exposure to wildfire damage are Colorado ($15.2 billion) and California ($13 billion), followed by Texas ($6.3 billion), Oregon ($1.7 billion), Arizona ($1.2 billion) and New Mexico ($1.18 billion).

Record wildfire damage burned more than 9.3 million acres in the United States last year. Many of the fires of 2012 were massive, with 51 fires exceeding 40,000 acres and 14 over 100,000 acres, according to Thomas Tidwell, chief of the USDA Forest Service. In 2013, only 4.1 million acres have burned—almost 1 million acres less than the 10-year average calculated by the National Interagency Fire Center (NIFC).

Yet this year brought the 257,000-acre Rim Fire, considered the third largest fire in California history, and June’s Black Forest Fire between Colorado Springs and Denver consumed more than 486 structures, making it the most destructive fire in Colorado history.

This year’s fires have set other grim records. In June, 19 firefighters died fighting the Yarnell Hill Fire in Arizona—aside from one incident in 2003, it was the deadliest day for firefighters since Sept. 11, 2001.
Overall, wildfire season lasted two months longer than usual, mainly because of persistent drought and below-average precipitation. “Though this year’s fires haven’t been as frequent or widely destructive as the 2012 record-setting season, drought conditions that reached unprecedented levels last year still plague many of the Western and Plains states and are forecast to persist into late fall,” CoreLogic reported.
Indeed, the September edition of the NIFC’s National Significant Wildland Fire Potential Outlook indicated that above-average temperatures and below-median precipitation could continue through December in some of the regions most at risk.

More Property in Danger
“As cities grow in population, they tend to expand outward into formerly undeveloped wildland areas. Just because your home is located within a city boundary does not necessarily mean you are safe from wildfire destruction if there is wildland vegetation nearby,” said Dr. Thomas Jeffery, senior hazard scientist for CoreLogic Spatial Solutions. “Since much of the expansion on the urban edge consists of residential properties, an increasing number of newer homes are located in close proximity to natural wildland areas where the potential for wildfire damage is much greater.”

According to the CoreLogic report, “Between the years of 1990 to 2008, there were close to 17 million new homes built in the United States, of which 10 million (58%) were located in the WUI [wildlife urban interface] and, therefore, potentially exposed to higher wildfire-risk zones.”

More than 70,000 communities are now at notable wildfire risk because of their proximity to heavily vegetated land and national forests, Tidwell said. And that number is growing faster than expected. In September, the Commerce Department found that new construction of single-family homes rose 7% to an annual rate of 628,000 units—the highest level in six months. The majority of this new construction takes place, by necessity, on the outer edges of existing urban areas, in the WUI—the land most vulnerable to wildfire damage.

Insurers Push Mitigation
A longer wildfire season and increased amount of property at risk do not bode well for insurers, which face greater challenges to insure homes, and greater payouts as more properties suffer damage. The NIFC said that using fire-resistant building materials is the best way to protect property against wildland fire, but many insurers are advocating more aggressive measures to prevent fires from spreading to covered properties.

In June, State Farm notified policyholders that 22,000 homes across Arizona, Nevada, New Mexico, Utah, Colorado and Wyoming would be inspected to identify necessary treatments to reduce wildfire hazard. State Farm selected the properties—over half of which are in Colorado—based on projections of potential future losses in high-hazard areas. According to the insurer, “The degree of risk was determined using a combination of factors: vegetation characteristics, topography (slope and aspect), population density, lightning strike density, and the proximity of roads and railroads.” Homeowners will bear the financial burden of any measures inspectors deem necessary to reduce potential hazard and bring conditions in line with a more aggressive wildfire mitigation plan. These new provisions double the National Fire Protection Association’s recommended defensible space zone to a 100-foot clearing.

This decision could drastically alter the appearance of residential communities across the West by requiring elimination of trees and plants on many properties. Those who do not comply will face policy cancellation, a particularly compelling threat as State Farm insures 22% of all Colorado homes, collecting $336 million in premiums annually, according to the Department of Regulatory Agencies.

As the dominant insurer in the region, State Farm’s move also increases emphasis on mitigation that will be felt throughout the industry. The National Fire Protection Association’s FireWise wildfire safety program recently increased its recommended defensible space perimeter from 30 feet to 50 feet. Some particularly high-risk areas in California have 100-foot defensible space ordinances, but such extensive clearings are rare. This aggressive move from an insurer opens the door to place greater burden on homeowners to mitigate risk—and may mean insurers will reduce future payouts after instituting similar demands.

Push-back has been light. “We don’t receive a lot of refusal,” said State Farm spokeswoman Angela Thorpe. “Since we began in 2003, less than 1% of our customers have been non-renewed or cancelled because they refused to follow the prevention recommendations.”

But according to the Colorado Springs Gazette, many locals are shopping around for new insurers and finding none are interested in writing new policies for homes in high-risk neighborhoods. Some report being dropped and having to buy expensive policies with high-risk specialist Lloyd’s of London.

So, while growth continues in the size, season, and potential impact of wildfires across the West, it appears that in the long run, the insurance industry may have the greatest impact of all.

Hilary Tuttle is managing editor of Risk Management.