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Role of insurance in wildfire risk mitigation

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  • Hazra, Devika
  • Gallagher, Patricia

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.

Suggested Citation

  • Hazra, Devika & Gallagher, Patricia, 2022. "Role of insurance in wildfire risk mitigation," Economic Modelling, Elsevier, vol. 108(C).
    • Handle: RePEc:eee:ecmode:v:108:y:2022:i:c:s0264999322000141
    DOI: 10.1016/j.econmod.2022.105768
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    1. Gu, Zheng & Li, Yunxian & Zhang, Minghui & Liu, Yifei, 2023. "Modelling economic losses from earthquakes using regression forests: Application to parametric insurance," Economic Modelling, Elsevier, vol. 125(C).

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    More about this item

    Keywords

    Insurance premium; Wildfire; Risk mitigation; FAIR Plan; Home insurance;
    All these keywords.

    JEL classification:

    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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