Tag Archives: wildfires

An Early Taste of Climate Change Disrupting Insurance

There’s a line that I first heard only a few months ago but keep running across: You may think you have a 30-year mortgage on your house, but you really just have a one-year mortgage.

Why is that? Because you have to renew your homeowners insurance every year, and your house is only affordable if your insurance is.

In the vast majority of cases, homeowners have nothing to worry about. Their premiums will change modestly from year to year. But those on the front lines of climate change — along coasts, where water levels are rising, and in parts of the country where wildfires are escalating and violent storms may become more frequent — may face sudden changes that could even force them out of their homes.

California, the bellwether for so many things in the U.S., is again in the lead on this insurance issue, showing how very complicated it will be.

Wildfires have burned more than 2 million acres in California this year. That is already an annual record even though September and October are historically the worst for wildfires.

The possibility of wildfires has put some 800,000 homes at risk of becoming uninhabitable because of soaring insurance premiums or of having insurers simply decline to cover them. State regulators ordered insurers not to cancel policies on those 800,000 homes, which are in or near dangerous areas, but the ban expires in December and can’t be renewed. As this New York Times article details, insurers, regulators and customers are all working to solve the problem — but not having much luck.

Data suggest that, in other areas, insurers are canceling policies or pricing homes out of the market. As the Times reports, “The number of households buying coverage from California’s high-risk insurance program, a costly and bare-bones alternative for people who can’t get private coverage, has increased by more than 50% between the start of 2019 and June 2020, to almost 200,000 households.”

And even that program is becoming less accessible: The article adds that the program “has asked the state for permission to raise its rates by 15.6%, after initially seeking an increase more than double that amount.”

Obviously, insurers need to be able to price based on the risk associated with each home, but it’s not that simple. People demonize insurance companies that pull out of a market or that jack up rates after a disaster — and people vote. So, regulators — at least, those who want to be reelected or reappointed — tend to limit rate increases and may block cancellations.

California has a further wrinkle (as it so often does): Insurers are only allowed to use historical data when underwriting policies. So, even though projections are for the fires to keep getting worse as the climate heats up, that information doesn’t count — it can’t be used in pricing.

State lawmakers attempted a compromise that would have let insurers use projections and incorporate some other costs into pricing, if insurers would make coverage more widely available and provide incentives for measures that would reduce fire risk. But consumer groups argued that the deal was too favorable to insurers, and it eventually fell apart.

Economics has to win. There’s no alternative. Assuming that climate change continues to worsen the wildfire threat in California and elsewhere, insurers will have to increase rates a lot or drop coverage, and homeowners in endangered areas will have to harden their properties to greatly reduce risk, pay those higher rates or move.

As I noted in last week’s Six Things, some 43,000 homeowners have already taken buyouts from the federal government and relocated rather than continue to fight nature in areas being inundated by coastal waters. A similar shakeup will have to account for wildfire and perhaps other types of storms, such as the derecho that damaged millions of acres of Iowa farmland last month and will reduce this year’s harvest by 25% to 50%.

But economics won’t necessarily win any time soon. The failure to reach a compromise in California suggests that the state will muddle along, with consumer groups and insurers at odds and with regulators caught somewhere in the middle.

Muddling along is hardly ideal. A clear vision that could lead to an actual plan would be far preferable. But the best I can suggest is that those of you who don’t live in California and don’t have to experience the dysfunction directly should keep an eye on what we go through. Lots of insurers, regulators and homeowners will likely have to confront issues related to climate change, so you might as well learn from the mistakes by those of us in California so you don’t have to make all of them yourselves when your turn comes.

Stay safe.


P.S. Here are the six articles I’d like to highlight from the past week:

How ‘Explainable AI’ Changes the Game

AI often performs its magic with little insight into how it reached its recommendations. “Explainable AI” makes all the difference.

The Future Isn’t Just for Insurtech

The new promise — the modern concept of insurtech — is a strategy driven by collaboration and innovation rather than disruption.

‘Virtualizing’ Your Customer Service

For the insurance industry, meeting increased customer demands with excellent service requires the right combination of technology and training.

New Operating Model for Insurers (Part 1)

Taking a few key steps will enable an insurer to resolve its operational challenges and lay the foundations for future success.

COVID-19 and Need for Analytical Insurers

Stronger analytics can assist insurers through the COVID-19 crisis, and create building blocks for longer-term business benefits.

Of Independent Agents, Heirloom Tomatoes

Direct vs agency is a silly fight. Neither channel maps cleanly to customer preferences. Both have advantages and disadvantages.

Are Sharknados Next?

Many years ago, when I watched “Biloxi Blues,” the Neil Simon play about a young draftee suffering through basic training in Biloxi, Mississippi, I laughed hard at the way actor Matthew Broderick whined the line, “Man, it’s hot. It’s like Africa hot. Tarzan couldn’t take this kind of hot.”

I’m not laughing now. I can’t swear that Tarzan couldn’t take the “kind of hot” we’re experiencing in California, but I’m certainly struggling. The high temperatures in the Central Valley have exceeded 110 for several days now and are expected to be between 100 and 110 for as far as the eye can see on weather forecasts. Even in the Lake Tahoe area, where I’ve spent many a pleasant summer, temperatures are so high and wood so dry that four fires have produced the Reno, Nev., weather station’s first report of fire tornados — the fires literally produced tornados of flame and laid waste to tens of thousands of acres.

What’s next? Sharknados? And what, if anything, can we do?

Well, there certainly doesn’t seem to be a break coming any time soon, and not just in California. While I whine about highs of maybe 113 in Northern California and the rolling brownouts and blackouts, Death Valley recorded 130 degrees down south, thought to be the world’s highest temperature since 1931, and forecasts are for the heat wave to be unrelenting. Meanwhile, in Iowa, a derecho — a wide line of fast-moving storms characterized by winds that can reach hurricane force, by tornados and by heavy rains — devastated 12.4 million acres of soybeans and corn early last week. A city council member in Cedar Rapids, Iowa, said trees are piled six to 10 feet high along streets — “It’s like driving through a tunnel of green.” The East Coast is facing its 11th named tropical storm so far this year, forming in the Atlantic, even though the 11th storm usually isn’t named until well into October. (Storms are named when they reach a certain threat level.)

While the U.S. gets most of the focus just now, Siberia has had a crazy heat wave of its own. A town named Verkhoyansk just recorded a temperature of 100 degrees. That may not seem that extreme, but the town is in the Arctic Circle. It was previously known for tying the lowest temperature on record, at minus-90.

You can decide for yourself just how severe climate change will be and how quickly it will occur, but trend lines on heat certainly suggest to me that this won’t be the last summer when I complain about Tarzan-level heat and when my friends on the East Coast have to batten down the hatches in the face of a string of hurricanes.

The only thing I know to suggest is to prepare. We had authors predicting a bad hurricane season last spring, such as in this article from May 10. We’ve also published extensively on better ways to understand wildfire risk, including in a three-part series whose first piece, dated July 6, is here. The articles describe what seems to be a promising way to correlate various risks, even when the areas involved are not near each other.

I’d love to be able to offer ways to head off the sort of devastation that, say, Iowans are facing, but I don’t imagine it’d do much good for me to tell the sun not to shine and the winds not to blow. So, better preparation is about all we can do for now.

The sorts of improvements in modeling described in those articles on hurricanes and wildfires can help. So can better sensors. Tiny, inexpensive weather stations dotting the countryside might pick up the signs of a derecho or other major storm faster than we can now.

Technology is also starting to help us react faster once tragedy strikes. Reports from the devastation in Iowa came in quickly, thanks to aerial surveys by drones, so recovery can started promptly. Parametric insurance policies or provisions written into standard policies can make a certain percentage of a claim available almost immediately, helping the insured get back on his or her feet faster.

There are even the beginnings of hope on prevention. Strings of small satellites that various companies are launching will monitor the Earth in real time and spot blazes when they are far smaller than most are when identified now. But that’s mostly theory at this point. It’ll take some time to implement.

This will be a slog. We’ll do our best to keep you updated on promising developments and hope you’ll pass along any ideas you have.

In the meantime, stay cool, stay dry and stay away from those fire tornados.


P.S. Here are the six articles I’d like to highlight from the past week:

COVID: Chance to Rethink Workers Comp

As insurers worry that the pandemic is depressing premiums, here is a way to rethink workers’ comp — plus two entirely new product ideas.

Why COVID-19 Must Accelerate Change

According to a survey, insurers are 50% behind consumer demand for service via online chat and 25% behind on service via website.

COVID-19 Sparks Revolution in Claims

The pandemic has pushed workers’ comp toward telehealth, which is revolutionizing the claims process in four key ways.

5 Hurdles to Insurtech Success

Here are five things that stand between insurtechs and success — but, please note, your mileage may vary.

Watch for This 1 Word on Customer Needs

Use this simple technique to uncover customer needs, drive innovation in customer experience and keep your business ahead of the curve.

An Inconvenient Sales Truth

It is no longer enough to show up with a fancy spreadsheet, promises of better service and a capabilities presentation.

How to Get Ahead of Wildfire Risk

This is part 3 in a series. You can find part 1 published here and part 2 here.

Wildfires, like tornadoes, can leave one property leveled and its neighbor unscathed — jumping houses, neighborhoods and boundaries with seemingly no rhyme or reason. The devastation seen with 2018’s Camp Fire— which consumed everything in its path and leveled the town of Paradise— wasn’t what happened in Malibu with the Woolsey fire, which hopped the Pacific Coast highway. Now, and admittedly not soon enough, innovations in data and analytics are helping carriers be more proactive with their mitigation and event response operations.  

Having lived in the San Francisco Bay Area, I’ve seen how utterly devastating wildfires can be to communities. California is running out of space, and people are being forced to live and work in wildland-urban interface (WUI) areas that weren’t originally planned for development. But while there is a logical reason for why wildfire risk is intensifying, seeing the devastation is sobering. I recall driving through areas hit by 2017’s Napa fire and witnessing total losses next to areas that were untouched. This gave me perspective about what it must have been like on the ground during the devastation. 

Too many of my coworkers have faced similar experiences — knowing the fear of evacuation and the hope that your house will still be standing. That’s why wildfire risk is a key focus for us here at Insurity.

Understanding the potential path of wildfires is crucial, as they can spread incredibly fast. In fact, 2017’s Northern California fires advanced at a rate of more than a football field every three seconds. Yet perimeter data has historically been generated slowly, especially with a lack of publicly available data over weekends. It’s no wonder insurers have always been a step behind with their wildfire event response efforts, and frequently left in the dark during an event, not knowing which insureds have been affected. 

Years of devastating losses have caught some insurers by surprise, and established players have suffered. The wildfire peril, traditionally viewed as a secondary risk, is now a primary risk worthy of focused attention and solutions. Now, technology is helping to shape solutions, like improved perimeter data and automated event alerts and analytics.   

See also: Wildfire Season: ‘The New Abnormal’? 

Up-to-date event perimeter data 

Advancements in NASA’s satellite imagery, for example, coupled with geospatial technology are providing insurers with up-to-date event perimeter data. Instead of guessing how a fire has grown and which insureds are affected, carriers can get regular fire boundary updates in the context of their portfolios. But, while data showing burn area and active burn spots is publicly available from sources like NASA and GeoMac, it’s not quick or easy for insurers to operationalize on their own to understand the impact.

By integrating GeoMac and NASA’s Visible Infrared Imaging Radiometer Suite (VIIRS) data with Insurity’s data enrichment and geospatial analytics platform, SpatialKey, insurers get faster perimeter updates while understanding the impact to their portfolios. With the ability to contextualize the data, insurance professionals can visualize exposure, apply buffers and filters, and understand TIV and policy exposed limits. 

Shown above is NASA fire perimeter data from the Woolsey fire in California. This data has built-in buffers set at one, two and three miles from the perimeter. Insurers can join portfolios to understand which insureds are inside the perimeter and apply buffers and filters to understand TIV and policy exposed limits. 

With the severity of wildfire events likely to continue and megafires emerging as a trend, it’s critical for insurers to be able to keep up with these events. Accurate and up-to-date wildfire perimeter data is one way insurers can implement a more timely approach. 

Automated event alerts and analysis

While up-to-date perimeter data is critical, it’s still a manual solution that requires insurers to know that an event is happening (or has happened), and then retrieve information to understand impact. But what if the information could be proactively delivered to you instead?

Automated event alerts and analysis will be a game-changer for wildfire event response by ensuring carriers stay in the know regarding events that have affected or may affect their portfolios. Analyses are executed automatically based on an insurer’s latest exposure data, as well as predetermined financial and peril-specific thresholds (meaning, anything hitting an insurer’s inbox has been prescreened and is worthy of immediate attention). 

See also: Parametric Solution for Wildfire Risk

Moving from “react and respond” to “prepare and serve” 

Using a combination of data and analytics solutions, insurers can monitor and mitigate wildfire risk — finally taking the guesswork out of what’s historically been a fast-moving and elusive risk. Insurance organizations are facing greater scrutiny as wildfire events become increasingly volatile.

How effectively you prepare for and respond to these events can either be an asset or a detriment, and you can take steps toward safeguarding your insureds while moving from “react and respond” to a “prepare and serve” approach.

Helping Insurers Get a Handle on Wildfire

“California is the lab for managing exposure to wildfire risk,” according to Lynn McChristian, a professor of risk management at Florida State University. If carriers and reinsurers can make it there, they can make it anywhere.

The past several years have seen a steep increase in the severity of wildfires, with the 2017 and 2018 seasons causing $24 billion in insured losses in California alone. Rates are climbing there, and coverage is dropping—there is clearly insufficient wildfire coverage to meet market demand, especially in high-risk, wildland-urbane interface (WUI) communities. 

These historic losses, combined with insufficient solutions for managing wildfire risk, mean insurers are trying to get a handle on their wildfire portfolio accumulations and gather perspective on relative risk. Simply put, the old way of doing things has been proven not to work—and insurers are demanding better. 

The flaw with historical wildfire risk management: Fires don’t burn in a circle

The California wildfires illuminated that many companies do not have clear best practices around managing wildfire risk, primarily because it has often been considered part of wider policy terms.

One solution is to limit accumulations between highly correlated areas of wildfire risk. Historically, insurers have looked at their concentrations of wildfire risk at the county level, along with using ring accumulations as a tool to assess risk. But fires don’t burn in a circle, and they don’t know postal code boundaries. Now, RedZone, a wildfire modeling company, has used millions of wildfire simulations to identify burn patterns across the landscape to create areas called “correlated risk zones.”

See also: Parametric Solution for Wildfire Risk

These zones are essentially regions that look completely separate but, statistically, burn together. They provide a logical and credible alternative by which to manage portfolio risk accumulations, alongside traditional loss modeling techniques. A more consistent approach to managing capacity can also improve risk-based pricing.

Solving a portfolio-scale problem requires changing the way we think

“Models have focused on risk at specific locations, but this is a portfolio-scale problem,” RedZone CEO and founder Clark Woodward says. 

The above screenshots show RedZone’s models for use in portfolio-level analysis. On the left is RedZone’s burn probability layer. When combined with the image on the right, which is RedZone’s hazard control zones, you can develop a firmer understanding of portfolio composition when it comes to accumulations and likeliness to burn. 

Accumulation analysis involves defining zones of correlated risk—where properties are likely to be damaged by the same event in the same year—and estimating the probable maximum loss (PML) within each zone. By evaluating accumulated wildfire risk, insurers can assess where additional properties may be insured with minimal increase in exposure to extreme losses. 

Reinsurance broker Willis Re has also brought to market a new methodology for wildfire underwriting and customer-specific portfolios. By helping carriers understand not only individual risk selection but geographic areas that are driving up their PMLs, Willis Re can, in turn, help them diversify their portfolios and drive down reinsurance costs.

Practical innovation that can be deployed now  

It’s taken a beat—and a harsh reality check—but better wildfire risk management strategies are now coming to fruition. Providers like RedZone, Willis Re and Insurity are working collaboratively to create solutions, like the correlated areas of risk discussed here, that provide better, more logical ways of managing wildfire accumulations.

This technology can be quickly deployed and implemented alongside traditional risk management strategies. This allows insurers to avoid disruption while employing a consistent approach to managing capacity across both underwriting and portfolio management and, ultimately, better serve and protect insureds against wildfire risk.

How Climate Change Is Increasing Rates

A growing number of policymakers, advocates and experts predict that extreme weather may lead to higher costs for home and flood insurance.

Some analysts are even predicting that the effects of climate change may make home insurance and flood insurance unaffordable for many Americans.

Home insurance companies charge higher premiums to cover property associated with higher risks. Added insurance costs could lead to lower home prices.

“As insurance rates rise commensurate with increasing risk related to weather hazards, and property taxes rise to cover the costs of climate mitigation and adaptation, real estate values for properties in vulnerable areas will fall,” predicts Donna Childs, author of the book “Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses.”

“The insurance premiums and property taxes for these properties become higher,” Childs said.

Daren Blomquist, senior vice president at ATTOM Data Solutions, observes that natural disaster risks have affected home prices. Blomquist notes that home price appreciation in cities with the highest flood risk was half that for the U.S. housing market overall during the past decade. It’s been one-third that for cities with the highest hurricane surge risk.

“The broader market has also outperformed appreciation in cities with the highest wildfire risk during the last decade, although the gap is much narrower,” Blomquist said.

Climate change top insurer issue

Many insurance experts consider climate change as one of the most pressing issues. That concern may lead to higher insurance costs for homeowners.

The riskier the property, the more an insurer charges. The result — more climate change-related claims means:

  • Higher insurance costs
  • Insurers becoming stricter about who even gets coverage

“It could limit coverage availability in vulnerable areas that have not taken appropriate mitigation/adaptation measures,” warns Childs, founder and CEO of Prisere, a software developer providing technical assistance and training for climate and disaster resilience.

Todd Teta, chief product officer at ATTOM Data Solutions, was recently affected personally when an insurer rejected him for a homeowners policy in California. The reason: wildfire risk.

Teta said the community suffered a small fire three years earlier, but no structures were destroyed. However, the insurer was still concerned about potential risk.

“Insurance companies are outright rejecting entire ZIP codes because of wildfire risk, even in areas they previously wrote policies in,” Teta laments.

See also: Role of Big Data in Fighting Climate Risk  

Wildfires more common

One likely byproduct of climate change is more forest fires. The Center for Climate and Energy Solutions said research shows that climate change, particularly earlier snow melt, leads to hot, dry conditions and more fires in the summer. The U.S. Department of Forest Service forecast that an average annual one-degree Celsius increase would increase the median burned area by as much as 600% in some forests.

There were 58,083 wildfires in the U.S. in 2018 and 71,499 wildfires in 2017, according to the National Interagency Fire Center. Roughly 8.8 million acres burned in 2018, compared with 10 million in 2017.

The Insurance Information Institute (III) estimates that insured losses from the 2018 Butte County “Camp Fire” will ultimately reach between $8.5 billion and $10.5 billion.

Home insurance typically covers wildfire damage. However, if your area is prone to forest fires that spread to homes, your insurer may exclude covering that damage. Look through the exclusion section in your home insurance policy, so you know if wildfire damage is excluded from your coverage.

Flooding claims

About 90% of natural disasters in the U.S. are tied to flooding, according to the Federal Emergency Management Agency (FEMA). There is a lack of consensus on whether climate change is leading to more flooding. The Natural Resources Defense Council (NRDC) recently said that it’s tricky to connect the effects to flooding.

However, the Intergovernmental Panel on Climate Change noted in its special report on extremes that it’s becoming clearer that climate change “has detectably influenced several of the water-related variables that contribute to floods, such as rainfall and snow melt.”

Flooding complicates things when it comes to insurance. Home insurance doesn’t usually cover flood damage. Instead, you need a separate insurance policy for flooding that comes from outside your home.

FEMA’s National Flood Insurance Program (NFIP) administers flood insurance. Federal flood insurance is available “where the local government has adopted adequate floodplain management regulations under the NFIP — and many communities participate in the program.”

Avoiding coastal areas and flood zones won’t necessarily protect you from flooding. III indicates that 20% of flood claims come from areas with low to moderate flood risk.

“Recovering from just one inch of water inside your building can cost about $27,000,” Janet Ruiz of the III explains.

Insurers are bracing themselves for more flooding claims in the coming years. More flooding claims will result in higher rates and can even affect home purchase prices. Those who own homes in higher-risk areas are seeing their values increase at a lower rate than the national average.

Here’s how flooding claims have increased in recent years.

Despite the increase in claims and average flood claim amounts, flood insurance policies are purchased less frequently today than they were a decade ago. In 2009, insurance companies sold 5.7 million flood insurance policies. In 2017, the number dipped to slightly more than 5 million.

Tornadoes, hurricanes and climate change

The Center for Climate and Energy Solutions says some areas, such as the North Atlantic, have seen more hurricanes over the past three decades. Scientists predict Category 4 and 5 hurricanes will increase in the coming years, though the overall number of hurricanes may decrease.

“Although scientists are uncertain whether climate change will lead to an increase in the number of hurricanes, warmer ocean temperatures and higher sea levels are expected to intensify their impacts,” according to the Center for Climate and Energy Solutions.

States prone to hurricanes feature hurricane deductibles. If your home gets damaged in a hurricane, you’ll have to pay a hurricane deductible after filing a claim. These deductibles are different from regular home insurance deductibles.

Depending on an area’s risk, hurricane deductibles are based on a percentage of a home’s insured value. It’s usually between 2% and 5%, but Florida allows insurers to charge up to 10%.

Whether your home policy covers you for hurricane damage depends on the fine print. You may need to get a windstorm rider to cover hurricane damage, such as lost siding, shingles or shattered windows.

Combating climate change and rate hikes

Childs said taking preventive actions can lower risks. “For example, when I purchased my home, the land on the western side slopes downward at a 30-degree angle, and the basement windows are flush with the ground, with the result that water would come downhill, creating the risk of water intrusion into the basement,” Childs said.

See also: Parametric Solution for Wildfire Risk  

Childs trenched this area and inserted a serrated pipe that connects to the sewer system. She also made a significant energy retrofit that reduced her utility bills by 40% and protects against the risk of extreme heat.

Childs said home buyers should factor in climate risks when purchasing a home, including figuring out whether to buy flood insurance, even if you’re not in a high-risk area.

When buying a home:

  • Shop around for insurance and know what you’re buying. If you need additional coverage, ask the insurer about riders and other coverage.
  • Take precautions to protect your home. If you’re building a new home, talk to the builder about the materials being used. If you live along the coast, check on storm shutters. Explore fire-suppression systems. All of these additions could lead to lower rates and even home insurance discounts.

You can’t completely safeguard against climate change-related weather damage. But it’s wise to take precautions and know how you’re covered to minimize later problems.

You can find the original article published here on Insure.com.