As part of our CAS Research Review series, the CAS is highlighting important papers and articles you may have missed! Here we speak with Milliman consulting actuaries Nancy Watkins, FCAS, and Peggy Brinkmann, FCAS, CSPA, two of the authors of Catastrophe Models for Wildfire Mitigation: Quantifying Credits and Benefits to Homeowners and Communities.
CAS: What prompted you and your co-authors to write this paper?
Nancy Watkins: Wildfire risk in the West is already high, and it’s only going to worsen with climate change. Insurance companies are already feeling the impact, and the effects for them are also going to intensify unless something is done.
The fires from 2017 and 2018 alone wiped out two times the insurance company profits from the previous 26 years. Since then, premium increases have caused an outcry, and we’ve seen an availability crisis in high-risk areas. Even if insurance companies were able to price the risk as high as they wanted, it wouldn’t solve the problem.
But science can help solve the problem. We think that understanding how to use catastrophe models to prioritize mitigations, to compare different options, and to understand the costs and benefits of those options can help society make better decisions. Bringing these issues to light is one of the most useful things the actuarial profession can do to help address wildfire risk.
CAS: What surprised you about the findings?
Peggy Brinkmann: To our knowledge, this paper conducted the first-ever comparison between community and individual mitigation measures. In other words, we looked at the effectiveness of things a community can do to try to keep a fire from reaching its borders—expensive things like creating fuel breaks—versus mitigation measures that individual homeowners can take inside those community borders, like installing a fire-resistant roof and other hardening measures.
What we learned from our modeling and from talking with fire chiefs surprised us: that stopping the fire from spreading inside the community can be as impactful as stopping the fire from getting there in the first place. We didn’t expect to discover that there may be more benefit to investing in hardening homes than in trying to stop a fire from ever reaching those homes.
CAS: What do you hope happens now?
Nancy Watkins: We hope that as California considers mitigation credits, it learns from past experiences. In Florida, the imposition of mandatory mitigation credits without a proper methodology shocked the insurance market and created a new problem that took years to unwind. We don’t want to see that happen again.
There is a real desire to have homeowners get credit for mitigation actions they have undertaken, and we agree in concept that real risk reduction should be reflected in risk-based pricing. However, there’s a right way and a wrong way to do this, and we wanted to show the right way.
What we hope is that this kind of investment by the CAS in research and leadership will help regulators and consumers trust the actuarial profession to provide independent, objective advice to address the complications surrounding wildfire risk and mitigation. The problem is not going to be solved entirely by this paper, but we think it’s a great start.
To access the full paper, visit the CAS website.
