Role of insurance in wildfire risk mitigation

Abstract

With wildfire-risk rising globally, the role of home insurance continues to remain under-studied in the search for mechanisms to mitigate loss from wildfire. This study investigates whether insurance policies effectively discourage homeownership in fire-prone zones. Using zip-code level data from Los Angeles between 2011 and 2018, we employ linear regression, GMM and machine-learning to examine the extent to which wildfire-risk impacts FAIR plan vis-a-vis market insurance. Results indicate that insurance policies do not effectively disincentivize homeowners away from high-risk zones which is novel to the existing literature. This is because the marginal impact of wildfire-risk on both insurance premiums, is relatively lower compared to other factors, especially for private insurance. Moderate-to-high risk areas continue to remain underinsured. Evidence of underinsurance was found in racially diverse neighborhoods. Recommendations include designing policies such that difference in risk-premium reflects difference in wildfire-risk to discourage homeownership in high-risk zones.