june 2017

How can we rethink risk after such huge losses, for individuals and housing stock and the economy, after the wildfires in Fort McMurray (a $3.6 billion loss) and Gatlinburg (an estimated $1 billion loss)? And how well do we truly understand and rate for wildfire risk? This is a question that Rob Galbraith helped explore at the Cohesive Strategy Workshop in Reno, NV in April. Galbraith, who combines expertise in property underwriting and wildfire impacts, shares the insights he presented at the Workshop and in a recent webinar, in which he details the economic “levers” of change that may be guided by insurance carriers working in coordination (and cohesively) with community, governments, and fire responders.

By Rob Galbraith
Director of Property Underwriting at USAA

If you work with wildland fire and managing its impacts (good and bad), you know that it is a complex topic in which many stakeholders have a vested interest. Governmental agencies at the federal, regional, and local level play leadership roles and provide strategic direction. Academic institutions and non-governmental organizations (NGOs) are also major players, both on a national and regional level, and they often play a critical role in their communities. And, critical to successful management of wildland fire, political leaders and the citizenry are engaged to drive action on the ground.

Of the many stakeholders focused on helping communities become fire adapted and building resilient landscapes in areas where fire is a natural part of the ecosystem, insurance carriers are often perceived as a secondary player. There are a variety of reasons why this is the case, but what is generally overlooked is that insurance carriers have “levers” at their disposal in the form of incentives to policyholders. Compared to education alone, such incentives can drive more homeowner mitigation activity and better land use planning decisions. If community leaders are able to effectively partner with one or more private insurance carriers in their neighborhood to work together, they will likely achieve greater success than simply working alongside insurance carriers with no coordination of efforts.

The role that insurance carriers play In promoting wildfire mitigation

Many insurance carriers provide some form of education and outreach to their policyholders to inform them of their risk of being impacted by a wildland fire. Included in these messages are steps that the policyholder can take on their property to mitigate the risk of loss from a wildland fire, typically based on the concept of the home ignition zone and creating defensible space. Policyholder education efforts are often spearheaded by local agents and/or insurance trade associations and provide general advice in attractive marketing infographics. These are valuable messages, but often these messages are not tailored to the local community or coordinated with similar outreach efforts by governmental agencies and local NGOs. This can result in confusion by the property owner since there is no coordination on the wording or look and feel of the communications, even if the underlying messages are the same. Worse, at times the messages bring delivered by insurance carriers can conflict with those delivered by government authorities as landscapes vary widely across countries as do appropriate mitigation tactics. These differences across landscapes are generally not always incorporated into communications developed by insurance carriers, leading to impractical and/or ineffective mitigation messages.

Beyond policyholder education efforts, insurance carriers have at their disposal two big levers to back up their mitigation messages and spur action by their customers.

The First Lever: Insurance Discounts support mitigations

The first lever is the provision of insurance discounts to policyholders for performing wildfire mitigation actions, either at the individual homeowner level or community level. For example, my employer USAA is a national carrier in the United States that is a member-owned company dedicated to serving military members and their families, and they offer a discount for policyholders living within the boundaries of a recognized Firewise communities in seven states (AZ, CA, CO, ID, NM OR, TX). (The Firewise program is administered by the National Fire Protection Association in collaboration with the US Forest Service. Currently, over 1,400 communities in over 40 states are recognized as Firewise. For more information on the Firewise program, visit www.firewise.org).

In most locations, the discount is up to 5% of the total policy premium; for instance, if the total premium for a homeowners policy is US $1000 annually, then the discount is 5% or US $50 annually. While US $50 is not a large amount of money relative to the amount that homeowners typically spend to perform mitigation activities, it serves as a meaningful incentive or reward to motivate behavior. I have attended several community meetings — co-presenting with local fire departments to encourage homeowners to take proactive steps to mitigate their exposure to the threat of loss from wildland fire. And the impact of combining intangible benefits (e.g., life safety, avoidance of property and financial loss) with tangible benefits (e.g., discount on homeowners insurance, recognition as a Firewise community through signage) can be a powerful motivator.

The Second Lever: Provision of Insurance – offering to insure a house, or not

The second lever that insurance carriers have at their disposal is the provision of insurance itself. In the private marketplace, insurance carriers are generally free to choose whom to offer policies to and whom to refuse coverage to. This decision on whether to offer or decline to offer insurance coverage can be for homeowners making an initial inquiry to quote coverage, or it can occur at the policy renewal for existing customers, most often annually. Different jurisdictions have different regulations guiding the offering of insurance coverage, but in most locations insurance carriers have (1) the freedom to use reasonable means to assess the risk that wildland fire poses to their set of policyholders, and (2) the option to restrict offering coverage if they feel that the exposure to losses is greater than what they are reasonably able to charge in premium.


Why Insurance Pricing Does Not Properly Reflect Risk? Reasons include (but not limited to):

  • Financial losses and risk mismatch
  • Impact of suppression which subsidizes insurance industry
  • No industry standard wildfire model
  • Historically inexpensive reinsurance
  • Lack of good statistical data valuing $ loss reduction from mitigation
  • Cost to obtain home characteristics and other key hazard information


Insurance carriers may make the determination that the exposure is too great for an individual property location or for a particular area if they have a large concentration of exposure overall. For carriers looking to reduce their overall exposure to losses from wildland fire in a particular geographic location, a common technique is to impose some requirements to perform mitigation activities by the time the insurance policy renews (often 60 days). If the policyholder does not perform the required mitigation activities, the carrier will not renew the policy and the property owner will need to seek coverage elsewhere.

Requirements by insurance carriers for property owners to take steps to mitigate their exposure to property losses from wildland fire can be a powerful motivator — when those requirements adhere to scientifically-based principles. Government entities may have similar levers in the form of citations, fines, fees, tax withholdings, etc. when property owners are not in accordance with local regulations and ordinances, but these generally are not as impactful as an insurance carrier’s refusal to continue coverage.

However, at times the requirements from insurance carriers can be counter-productive as they impose unreasonable or unnecessary burdens on homeowners. For example, a carrier may require 100 feet of clear cutting to create defensible space around the home, but the property line to the adjacent parcel may be within 100 ft. Removing vegetation may also run afoul of local ordinances on the size and types of trees that may be cut down. Finally, these requirements from carriers may not be performed reasonably in the amount of time given and may give the homeowner misleading direction on the prioritization of mitigation actions, namely starting 0-5 feet from the structure and moving outward over time.

Where wildfire meets homes, the fire suppression response may protect homes but distort the full cost of insuring the homes from wildfires. Waldo Canyon Fire, Colorado Springs, CO, 2012. Photo: USFS.

Land use planning decisions — and how fire response subsidizes the Insurance Industry

If you ask a variety of individuals with different perspectives who should bear the cost of protecting private structures built in areas prone to loss from wildland fire, virtually all will agree that the cost should be borne by the private citizen(s) who own the property.

In reality, around the globe, this rarely occurs. Conceptually, the cost of protecting a home or other structure is reflected in the insurance premium that is paid by the property owner. This premium should reflect both the likelihood of ignition or smoke damage and the cost to repair or remediate the damage. Insurance premiums, however, fail to capture the full economic cost of protecting structures built in areas exposed to loss from wildland fire.

Feedback Loops and the Role of Financial Incentives. Graphic from Calkin, David E.; Thompson, Matthew P.; Finney, Mark A. 2015. Negative consequences of positive feedbacks in US wildfire management. Forest Ecosystems. 2:9. doi: 10.1186/s40663-015-0033-8.

The main reason for this is the presence of fire response efforts. No organization actively “puts out” a tornado or earthquake or tropical storm, but agencies do put out wildland fires. These suppression efforts play a large role in determining whether a particular structure ignites and suffers a loss. However, fire response resources are typically supported through taxes and fees to local homeowners, and therefore they act (inadvertently) as a subsidy for insurance premiums. If an insurance carrier does not pay a claim on the property because a potential loss has been avoided through the efforts of fire response, then the claim does not flow through to and affect their actuarial indications, which are used to set premiums.

Wildland fires that threaten structures but do not cause economic damages due to response efforts unwittingly disrupt the process by which insurance carriers assess risk and set premiums – through historical claims incurred and losses paid to policyholders. For other catastrophe perils such as tropical storms and earthquakes, statistical models have been developed that supplement historical losses. These catastrophe models serve as better measures of exposure to losses for insurance carriers and are relied on to set adequate premiums to cover expected claims from these perils. While there are many models to estimate the exposure to loss from wildland fire, none are currently used in a widespread and consistent manner by the insurance industry. So historical losses remain (for now) the method used to determine insurance premiums for wildland fire.

Since historical losses are used as the basis for setting insurance premiums to cover expected losses from wildland fire, and since suppression efforts prevent many structures from suffering economic losses, insurance premiums tend to under-represent the true economic costs associated with construction in areas prone to wildland fire. This directly reduces the power of offering insurance discounts to spur mitigation activities by property owners.

In addition, often the governmental agencies responsible for suppression are not connected with the agencies responsible for land use planning and development. As a result, the governmental agency responsible for approving new construction in areas with high exposure to wildland fire may not fully incorporate the total cost to government of providing fire response services to those property owners.

When these two factors come together in a community — the inadequacy of insurance premiums to account for the full exposure to loss from wildland fire, and the failure of governmental land use planning agencies to fully account for the costs of providing response capabilities – the result can be greater development in high-risk areas than would otherwise occur.

This is in contrast to areas prone to tropical storms, where insurance premiums based on catastrophe models appear to be driving more informed land use planning decisions as builders do not want to develop new construction in areas where high insurance premiums are a deterrent to potential home buyers. It also provides greater financial incentive to homeowners, which drives more action to harden their home against potential damage caused by tropical storms. A great case study is in Florida, where the passing of statewide building codes in 2001 along with the creation of the Florida Building Code mitigation credits has helped create a more resilient home stock over the past 15 years.

Incorporating insurance carriers into efforts to promote homeowner mitigation

In most cases, governmental agencies (and local fire departments in particular) do not have a line-of-sight picture into how insurance carriers factor into managing the negative impacts of wildland fire. In fact, the homeowner is often the first one to alert government authorities to the activities of insurance carriers by requesting advice on how to handle mitigation requirements being asked of them by their insurer.

Sometimes, property owners request government assistance with performing the required mitigation actions and request a letter to be sent to the insurance carrier vouching for their insurability. Local fire departments and fire marshals are generally stretched thin and do not have excess capacity to act as an intermediary between homeowners and their insurance carriers, yet it is not uncommon that they are put into this situation. The lack of coordination and communication between the insurance industry and other key stakeholders leads to confusion for one critical constituency in the effort to create fire adapted communities: the property owner.

Finding the best way to bring the insurance industry into the set of key stakeholders at the national, regional, and local level will vary greatly. A great place to start engaging with the insurance industry is through trade associations that represent a large segment of the insurance carriers as well as through governmental agencies tasked with regulating the insurance industry in your jurisdiction. Umbrella organizations such as the International Association for Wildland Fire (IAWF) and the National Fire Protection Association (NFPA) are also great resources that can assist in bringing stakeholders together.

Once engaged, a great first step is to identify common interests: namely, working together to prevent the loss of life and property from wildland fire while recognizing the integral part that wildland fire plays in many ecosystems. Just as government agencies and fire departments may not sense the role of insurance, many insurance carriers also lack the line of sight connection to all of the relevant stakeholders and are not familiar with efforts to coordinate actions in pursuit of common goals such as the Cohesive Strategy in the United States. Thus, a discussion of shared objectives between stakeholders that identifies areas of mutual interest and benefit will help greatly to better coordinate activities from traditional stakeholders as well as the insurance industry.

By working together towards these common objectives, traditional stakeholders can benefit from the powerful levers that insurance carriers have at their disposal to motivate action by homeowners to help create fire adapted communities. Additionally, through coordination of efforts, less time will be spent by insurance carriers and government agencies in a back-and-forth discussing of the insurability and proper mitigation of individual properties to retain insurance coverage, and more time providing a consistent message to property owners. And a core element of this message – that effective fire response may undercount the full economic risk of development in fire-prone areas – is a message we all need to learn, share and put into practice.


Author’s note: This post reflects the personal views of the author and is not an official statement or endorsement by USAA.