Photo: FEMA via Wikimedia CC 2.0 Research Questions What is the - PowerPoint PPT Presentation

Photo: FEMA via Wikimedia CC 2.0

Research Questions • What is the current wildfire risk in the study areas and how might climate change affect it through the end of the century? • How well is the residential insurance market currently working in the higher-risk fire areas? • How might the climate-induced changes in wildfire risk affect the residential insurance market? • What factors can affect how the residential insurance market will be affected by climate change? 2

Two study areas Sierra Foothills study area Area: 1.9 M acres Population in 2016: 650,000 Projected population in 2095: 1.3M Policies in force: 197,000 Insured value: $134 billion San Bernardino study area Area: 0.86 M acres Population in 2016: 1.46 M Projected population in 2095: 1.97 M Policies in force: 375,000 Insured value: $201 billion Work in progress. Do not cite. 3

Structure risk by zip code in the Sierra Foothills Study Area 4

Insurance Market Indicators Examined Market shares of admitted insurers, surplus lines market, and the • FAIR Plan Premium per $1000 coverage • Nonrenewal rates for policies in the admitted market • Ratio of coverage to insurable value • Number of insurers writing coverage in the admitted market • Insurance take-up rate • Size of deductible • Underwriting profit • 5

Insurance Market Indicators Examined Market shares of admitted insurers, surplus lines market, and the • FAIR Plan Premium per $1000 coverage • Nonrenewal rates for policies in the admitted market • Ratio of coverage to insurable value • Number of insurers writing coverage in the admitted market • Insurance take-up rate • Size of deductible • Underwriting profit • 6

Market share of admitted insurers is lower in high-risk areas 100% Market Share of Admitted Insusrers in ZIP Code 95% 90% 85% 80% 75% 70% 65% 60% 0.0 0.2 0.4 0.6 0.8 1.0 1.2 Structure Risk Index in ZIP Code Sierra Foothills Study Area San Bernardino Study Area 7

Market share of FAIR Plan and surplus lines market has been growing in recent years 700 600 500 Number of policies 400 300 200 100 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 FAIR Plan Surplus Lines Sierra Foothills Study Area 8

Premiums per $1,000 coverage are higher in high-risk areas $6.15 $5.15 Premium per $1,000 Coverage Premiums have $4.15 in ZIP Code been increasing $3.15 faster in high-risk areas $2.15 $1.15 $0.15 0.0 0.2 0.4 0.6 0.8 1.0 1.2 Structure Risk Index in ZIP Code Sierra Foothills Study Area San Bernardino Study Area 9

Wildfire risk affects nonrenewal rates and coverage- to-value ratio • Renewal rates vary by wildfire risk, but the differences are not great – Insurer-initiated non-renewals tend to be higher in high risk areas – Insured-initiated non-renewals tend to be lower in high-risk areas • There is some evidence that coverage-to-value ratios are lower in high-risk areas 10

Issues that can reduce insurer willingness to write in high-risk areas Issue Insurer Perspective CDI Perspective Inability to use Past loss experience is Difficult to assess accuracy of models; probabilistic not representative of models are open to manipulation and wildfire models in actual risk and lags misuse rate setting change in risk Constraints on Approved rate Substantial increase in high-risk areas have variation of rates “relativities” are flatter been approved; insurers have not by wildfire risk than they should be provided sufficient evidence to support requested differentials Exclusion of net Reinsurance is needed CDI cannot ensure reinsurance margins are reinsurance costs to reduce the risk of reasonable; insurers may use reinsurance in rate setting financial impairment to circumvent Prop 103; CDI already allows and bankruptcy insurers to charge a catastrophe load 11

Carbon emission forecasts used to project changes in of wildfire risk 12

Substantial increase in acres burned is expected in Sierra Foothills study area 700 600 Acres Burned Index (2010-2019 = 100) 500 400 CanESM2 8.5 300 CNRM-CM5 8.5 HadGEM-ES 8.5 200 MIROC5 8.5 100 0 Assumes RCP 8.5 Work in progress. Do not cite. 13

But little change in acres burned in San Bernardino study area 140 120 Acres Burned Index (2010-2019 = 100) 100 80 CanESM2 8.5 60 CNRM-CM5 8.5 HadGEM-ES 8.5 40 MIROC5 8.5 20 0 Work in progress. Do not cite. 14 Assumes RCP 8.5

Lower carbon emissions make a difference in Sierra Foothills Study Area 400 350 Acres Burned Index 300 (2010-2019 = 100) 250 200 RCP 8.5 150 RCP 4.5 100 50 0 Work in progress. Do not cite. 15