From Risk to Reward: Insurance Discounts for Wildfire Mitigation

In 2022, California implemented a major insurance reform requiring insurance companies to provide premium discounts to policyholders who undertake wildfire hazard mitigation, such as installation of fire-resistant roofs, vents, and windows and maintaining defensible space around homes. To evaluate early implementation of this reform, we draw on insurance rules and rate filings to create a database of mitigation discounts offered by insurers. We analyze how discount amounts vary across mitigation measures, insurers, and regions, and assess whether they are large enough to motivate homeowners to undertake these actions. We also compare the California policy to similar policies in states subject to hurricane and windstorm risks. Our results indicate that the current discounts are small: the costs of property retrofits are orders of magnitude greater than the insurance savings. They are also considerably smaller than wind insurance discounts in other states, which we attribute largely to greater uncertainty in the effectiveness of individual wildfire mitigation efforts, coupled with risk externalities from structure-to-structure fire spread and community-level fuel hazards that weaken the link between household-level investments and expected insurer losses.