Fire testing

Translated by Irene Cecchi

Trump back at the White House foreshadows a global political and economic earthquake. But not even one of the most influential US Presidents can erase natural disasters, although underestimating climate change.

The heavy rainfall that ravaged Valencia at the end of October it’s a reminder of how climate change can also hit the Global North.

Among the consequences there is also the insurance crisis in the US, that we already analyzed in the previous article. After the Presidential Elections we are once again talking about this topic in order to evaluate some potential measures to at least pack the wound, if not close it, a wound that might get worse now.

We will do it by focusing on one of the most iconic federal States, a state whose name might represent both a paradise on earth and a steaming oven, California.

California Dreamin’

In 2024, more than 7500 fires took place in California, lighting up more than a million acres and destroying almost 1500 buildings, and another 270 damaged to sum. After an extremely hot June, the State Farm giant increased its house insurance policies by up to 52% along with denying new ones.

With an offer that is every day more limited and inaccessible, the insurance issue doesn’t seem to be getting better, leaving the Golden State on fire and without protection.

In this context, Philanthropy California, a group of regional associations, started collaborating with the California Governor's Office of Emergency Services (Cal OES) to support first aid and long-term reconstruction. Among its efforts, there is raising funds to help marginalized or needy communities, connecting with funders, government partners and other organizations operating in the field.

Also the Center for Disaster Philanthropy (CDP) is providing a similar service, consults with donors to maximize their impact and support to communities with a dedicated fund, the California Wildfires Recovery Fund. In detail, the CDP works directly with local authorities and NGOs to identify specific needs, foster operations before and after the fires to improve preparation, mitigation, response and recovery.

In the meantime, due to expired and not renewed insurances, the estemes of lost value regarding buildings in California already reached enormous proportions.

According to an Insure Our Future analysis –a group of global NGOs that call on the responsibilities of the insurance industry related to the climate crisis– the average Californian house that doesn’t get a policy renewal might lose between 12 and 39% of its value. With more than a hundred thousand insurances not renewed, the total amount of loss would be around 10 to 32 billion dollars.

Home hardening

To hinder this trend, one of the proposals by the government is the so-called “home hardening” that refers to a now way of managing home greenery and construction materials to reduce fire vulnerability.

Among the home hardening measures there are the removal of all greenery near houses, including trees and flowerbeds, the installment of double tempered glass windows and the replacement of wooden fences.

A study carried out by Doc. Lisa Dale e Kimiko Barrett reveals that this kind of measures, like compulsory building rules and the home hardening project, are the most effective ones in reducing fire risks; but paradoxically also the least funded and supported.

On the other hand, they also report that suppressing fires is effective in the moment but it doesn’t help reducing the risk for the communities and in the long term it would worsen it instead. To a certain extent, natural fires prevent the excessive creation of inflammable biomass in woods, meaning that extinguishing a fire today could lead to a bigger one tomorrow.

The same study suggests the Congress to create adequate subventions for programs like the home hardening one and governments to foster compulsory building rules in the most vulnerable areas.

These kinds of measures manage to also not create rivalry with private insurance companies and in fact, the Insurance Institute for Business & Home Safety (IBHS), a non-profit research organization backed by the insurance sector, declared to be committed to make buildings more resilient.

The government of California seems to be open to these suggestions.

Sustainable Insurance Strategy

The most comprehensive solution promulgated by the Golden State is the Sustainable Insurance Strategy, workhorse by Ricardo Lara, an Insurance Commissioner of California (CDI).

Backed by the Governor Gavin Newsom, the Strategy includes three main goals:

1. Make insurances available and convenient, especially in high-risk areas.
2. Make a resilient insurance market, able to face climate change and economic fluctuations.
3. Protect communities from fires and natural disasters.

As explained in a Bankrate article, the main point of the strategy is the way insurance companies establish their rates.

Until now, insurance companies could only use historials to establish their rates, resulting in very high escalations after each event. With inaccurate data, in fact, the insurance price does not reflect precisely the risk possibility so, when facing big damages, companies must raise the premiums to stay in business or get out of the market.

In order to prevent this scenario, the CDI allows them to combine historical data with predictive algorithms, computer simulations and new scientific researches –the so-called “catastrophe modeling”– to improve their predictions of the events’ effects and set their price accordingly. Like this, insurance companies would be willing to keep operating in the Californian market and spread also in new areas, always left behind considered too risky.

Meanwhile, Mr. Lara set some conditions to be able to benefit from this catastrophe modeling –already used in the case of earthquake risk.

First of all, the CDI will strictly monitor the new models used by insurance companies and is also creating its own public model for fire disasters that can be used as the standard one. In addition, companies will have to sign at least 85% of their insurances in high-risk areas, the ones that were long ignored; they will also have to take the respect of building rules into consideration when setting their premiums.

Like this, every estate owner that enacted the home hardening measures will benefit from an insurance premium that reflects its efforts.

Public-Private Partnerships

Obviously, it’s still premature to say if the Sustainable Insurance Strategy is a success or not but for sure we have to give it the credit for showing that the legislature can proactively intervene instead of leaving the private sector and the civil society alone.

Last May, during a session of the Insurance Committee Assembly, Mr. Lara stated “We are trying to face XXI century problems with XX century rules. We have to be responsive. The past teaches us that we can’t spend any more time with static rules”.

Climate change is probably the reason why a change is needed.

Also the International Association of Insurance Supervisors (IAIS) acknowledges it. A recent report on the lack of protection against natural disasters –the so-called “protection gaps”, the share of non-insured loss– highlighted the importance of the private-public partnership (PPPs) to complement each other's faults.

It goes without saying, for these partnerships to succeed it’s fundamental that politics, both in the US and globally, takes its responsibilities and doesn’t turn a deaf ear to climate change.

Maybe, in front of the economic consequences of the US insurance crisis also a businessman doing business will have to hear it out.

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