Adaptation and Resilience

9.5 How Can Policymakers Protect Policyholders in a World on Fire?

Hosted by Daniel Bresette and Alison Davis

Guest Lisa Dale

April 22, 2025

           

 

Home insurance is one of those things you need to have and hope to never need. But as risk from climate disasters increases, many homeowners are finding it more and more difficult to obtain an affordable policy. This is especially true in the American West, where wildfires are creating more uncertainty than insurance companies are willing to cover, forcing many homeowners to enroll in state-run insurance plans. Daniel and Alison sat down with Dr. Lisa Dale, director of the Climate and Society Masters program at the Columbia Climate School, for a conversation about how policymakers can help communities navigate the insurance crisis as it relates to wildfires.

 

 

Show notes:

 

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Episode Transcript:

Daniel Bresette: Hello and welcome to The Climate Conversation. I'm Dan Bresette, president of the Environmental and Energy Study Institute.

Alison Davis: And I'm Alison Davis. It's great to be back after our colleague Hannah took the reins for our previous episode on abandoned mine lands. I wasn't really gone, but I was just behind the scenes. Anyway, for today's episode, we're teeing up a briefing planned for May 6 that will focus on property insurance in the era of climate change. The briefing panelists—along with special guest Senator Sheldon Whitehouse of Rhode Island—will cover a variety of climate impacts that are shaping the insurance crisis. Our conversation today, however, will hone in on wildfires and the unique challenges they present. Some of our listeners might remember the episode we did on wildfire threat assessment with Pyrologix founder Joe Scott last year. When asked about engagement with the insurance sector, Joe responded, “I don't know how insurance companies are using this information, because they don't tell us.” His answer was surprising to me at the time, so I am very excited to return to this topic.

Dan: Me, too. I'm really looking forward to this, and our speaker, who we’ll introduce in just a moment, is really excellent. And yes, Hannah did a great job. I hope if anyone in our audience didn't listen to the one about abandoned mine lands last time, definitely check it out. I'm sure we'll be hearing more of Hannah in future episodes. But back to the topic at hand. Globally, insured losses from wildfires doubled between 1993 and 2022. The American West is on the front lines of the wildfire threat, with more than 1.2 million homes at moderate to extreme risk, and that's just in California. Most recently, the Los Angeles wildfires dominated the headlines with much of the coverage illuminating concerns around insurance. According to the most recent consumer tracker data, insurance companies have already paid out over $12 billion in claims from the Eaton and Palisades fire, and that number is going to keep climbing.

Alison: The high cost of wildfire damage has resulted in rate hikes across the region. Decisions by major insurers are pushing residents of California, for example, to enroll in a state-run insurance plan, often referred to as the FAIR Plan. The FAIR Plan was designed as an insurance of last resort so that homeowners of high risk properties can obtain pretty minimum coverage for a higher premium. If that sounds like an unfair situation, you are not alone. Our guest today is here to explain how policy makers can help communities navigate the insurance crisis as it relates to wildfires.

Dan: Dr. Lisa Dale is the Director of the Climate and Society Masters program at the Columbia Climate School. Her research on environmental policy focuses on climate change adaptation in two distinct settings: rural agricultural communities in Sub-Saharan Africa, and wildfire risk zones across the American West. Having attended and presented at several U.N. climate conferences, Lisa focuses on the global institutional framework for climate change in her teaching. She has a background in both academia and politics, including five years as a policy advisor with the Department of Natural Resources for the State of Colorado. She earned a Ph.D. in Environmental Policy from Colorado State University. Lisa, welcome to the show! Thanks for being on the podcast.

Lisa Dale: Thanks very much! Happy to be here.

Dan: Lisa, you have worked with Headwaters Economics, and they produce amazing work, and that included a 2023 report, titled Missing the Mark, and that report found that managing the built environment is the most effective strategy for reducing wildfire risk. Why is the built environment so important for risk reduction? 

Lisa: Yeah, this is sort of the central finding of that research that we did in 2023. And really we explored and tried to compare different outcomes from different approaches toward wildfire risk reduction, including efforts we undertake to modify the fire itself, like fire suppression, or using controlled burns or prescribed fires to reduce risk. We looked at ways that we modify the forest, the fuel for the fire. So we looked at opportunities, for example, to conduct mechanical thinning projects, or other ways that we have logging or timber projects, for example, that reduce the biomass in the forest, again, as designed as a tool to reduce risk from wildfire. And then the third category was managing the built environment. And what we found across the American West, in particular, was that those first two categories—managing the fire and managing the fuel—were really, really limited. In particular, managing the fire may, you know, get rid of the immediate risk, but over the longer term, it allows fuels to build up in the forest, and therefore, when you put out a fire, you're saving those fuels, those flammable materials, for another future fire. And we also found that managing the forest by doing prescribed burns or thinning the trees can have some small effect on risk to local communities, but most of those types of projects and sales happen outside of the wildland urban interface, they happen more in the back country, and so their effects on communities are muted. But what we found is, for a household or a family living in these high-risk zones, if they're able to undertake home-hardening measures on their property, those have, by far, the best outcomes in reducing risk from unwanted wildfire.

Dan: That is super interesting. And the report also found that wildfire-resistant construction happens to receive less federal funding than the management of fire and fuels. That seems like a pretty illogical disparity, because, you know, the old saying is: “An ounce of prevention is worth a pound of cure.” How has this disparity impacted the home insurance crisis? 

Lisa: Well, let me just start by kind of explaining why that is, why the funding is so low, and it's because these are private properties. The way lots of federal politicians have described it to me is “we don't pay for your landscaping projects,” right? You take care of your own private property. The federal government is there to manage the public lands across the West, and that's including firefighting and managing the forest. So the first two categories fall into their category. That's their mission and their expertise. But those forest managers and fire managers are very quick to say, we don't have any authority to manage the private land or private property, so that's really where the disconnect is. And so we end up with homes across high risk areas in the American West. And if the homeowners can't afford or are unable to, for a variety of good reasons, do this sort of home-hardening on their own, they can't do it. There's very little support available. And so we end up with these real inequities, I think, across the landscape. To the second part of your question, I think this has a huge effect on the insurance market, on the home insurance market across the West. It means that risks are not being well-managed, and opportunities to reduce risks are not incentivized well in the existing marketplace. And what we have then is stable or growing risk, and really now a concerning pace of rising rates for home insurance policies and reduced options as more and more insurance companies leave that region or leave a particular state, because the risk doesn't add up for them.

Alison: So I'd like to talk about insurance certification programs and to name an example from the state where you used to live, Boulder County has the Wildfire Partners Program. But these programs can help manage the built environment by encouraging homeowners to obtain third-party certification on specific mitigation measures. Could you talk a bit about what these certification programs are exactly, and what are the advantages to them, and how can they be improved?

Lisa: Yeah, sure. So you know, they fit right into this place that we've just identified in this conversation. So we were just talking about, okay, so we know the best way to reduce risk is to harden homes, but we also know that there's no incentive structure in place, and there's very little financial support in place to move that goal forward. And instead, we sort of leave it up to individual homeowners to figure out that they need to do this, learn what to do, find the money, etc. An organization like Wildfire Partners can really fill that gap. And Wildfire Partners, as far as my research has suggested, is by far the leading organization doing this kind of work nationwide, and they've been working in Colorado now for at least 10 or 15 years, and they've now been made sort of part of the county government for Boulder County, which means they have access to some public funds, and the City of Boulder has voted to allocate some portion of tax revenue to Wildfire Partners to help reduce and ameliorate risk in the region. What they do is they partner with a homeowner who has to sort of invite them to come onto their property, and then they can come and do a technical appraisal of the property and provide some guidance and support for what kind of measures on that property would help to reduce risk from fire. And then they can actually implement those adjustments and modify the property, and then the homeowner gets a certification from Wildfire Partners, and that certification attests what kind of work has been done on the property. Some insurance companies are now interested in taking that certification and reducing the premium cost for policy-holders as a result of this kind of certification. More commonly, we see insurance companies taking note of this kind of certification work, sort of at a larger scale, at a neighborhood or landscape scale, and making insurance available that wouldn't have otherwise been available. So even if the rate of the premium doesn't change from a certification program, the insurability of the neighborhood very likely will. So the idea of Wildfire Partners is to not only incentivize but fund and support this kind of home-hardening effort, and then form these links with the insurance industry to help homeowners who are uninsured or underinsured obtain and keep and retain insurance.

Alison: You just mentioned areas that are considered uninsurable, and I was surprised to find in researching this topic that the state of California did not allow insurance companies to consider wildfire catastrophe models in rate setting processes until recently. Could you talk about what these catastrophe models are, and what was the reasoning behind the policy of not allowing insurance companies to use them, and what is the intended impact of changing that policy? 

Lisa: Most states allow catastrophe models, but California, in its effort, in its, I think, very well-meaning effort to make sure insurance remained affordable and accessible for its residents, imposed a regulatory limitation on rate-setting strategies that insurance companies could use, and that limitation was they were not allowed to use models to predict the future. They were only allowed to use data to understand the past as a risk-modeling tool. And now, to be clear, historically, this is how we always did it. We looked at the past. We said the last 10 years were, you know, this is the burn rate. This is the average probability of a fire. This is the estimated damage. And we would make our future projections based on the last 10 years. That's really standing practice for most risk agencies. But what we're learning is that as climate change is affecting more aspects of our weather and more of our system, the past is less and less of a good guide for predicting the future, and so we've had to modify our methodology and the way we think about estimating future risk. So the idea of catastrophe models uses algorithms and computer modeling, climate modeling strategies to take into account projected climate impacts and project those into the future. I think California's concern, and this is probably correct, is that if they estimated risk that way rates would go up, right? Because it's riskier in the future than it's been in the past. Now they want to protect their homeowners in the state, make sure insurance is affordable, but in the process, by sort of disallowing this methodology, they also succeeded in sort of muting the risk signal that insurance rates can play. So for example, if you live in a home in California, and your home insurance rates don't change or even go down, you might not have any idea that risk is escalating for you, because you might rely on that payment amount as a clue, right? It's a signal of risk. Now if all of a sudden your rates go way up, two things happen. One is, you might be priced out. You might not be able to afford insurance. You might have to move. But the second thing that happens is you much more clearly understand what you're up against, and you understand that it's changed year to year. So California really took a swing at some pretty innovative strategies to mute that risk signal, and they required reinsurance to be made available if you lost your home to wildfire, the insurance company was not allowed to drop you in California, they were required to retain your policy. The rate setting was really tightly constrained, and all toward this sort of equity goal, which I think we also all support, but they've gotten a lot of pushback on that, and part of what happened is insurance companies started to find their numbers weren't adding up in California because they weren't allowed to use these cat models. They had to rely on a flawed model to set rates, and they knew that that wasn't capturing the risk so they were quite exposed. So we began to see many insurance companies pull out of the state. California took note of this, I think, and modified the policy just, I think it went into effect just before the big LA fire. So there hadn't really been a chance yet for the insurance companies to take action on these new strategies, but they do now have access to catastrophe models and rate setting.

Alison: What is the dynamic between insurance premiums and the mortgage market? And what do you think that prospective homeowners need to be thinking about?

Lisa: Really, I think the main connection is for any homeowner who can't buy their home in cash and pay for everything in full and needs a mortgage and has to work with a bank, those banks always require home insurance to be purchased. So you know, if you are extremely wealthy and you don't need to take out a mortgage and you can pay full price and buy a house, you could conceivably also skip insurance, right? That would be up to you. It would be very high risk decision to not be insured, but if you have that kind of money, maybe you don't care, right? And we end up in a really bifurcated system where the very wealthiest people can afford to live in highly risky places without insurance, because they have all of these other forms of buffer and support. The rest of us, most people, need to buy a home and mortgage it with a bank. The bank will only hold that mortgage as long as you have an active home insurance policy. So if you own a home and your mortgage is contingent on your insurability, and your insurability, in turn, is contingent on risk profiles and state policies and state regulations and fire itself, you can see how things get really scary, right? For a homeowner who's facing the loss of their home insurance, that may mean they can find another policy, but it may mean they're uninsurable, and as soon as they're uninsurable, they may be unfundable, and they run into some real problems with their bank. It's worth noting that the state of California and 32 states nationwide have developed what are called fair plans. These are insurance plans of last resort, exactly for the type of situation we're describing here, so that nobody can say they're truly uninsurable. They can always find a policy through a fair plan. Policy may not be very robust, the policy may not be very affordable, but it exists, and that is intended in part to stabilize the housing market, because otherwise, every time somebody lost a policy, they would also lose their home, right? And so it's a bit of a band aid. It's a short term patch, being able to get access to a fair plan.

Dan B: Hearkening back to something you said, you know, this idea of catastrophe modeling right, using the data to predict the future, using the data to understand the past. Climate wise, we're in a place where the future is going to look and feel very differently than the past has. Feels like we are in a similar place, like an inflection point, with insurance. Insurance has been this thing. It's been around for a long time. It's probably under-appreciated in terms of how important it is for a lot of different things. It enables car ownership and home ownership and all the things you just described. But the model is not going to keep working if the product is going to be overwhelmed, right, the kinds of insurance offerings we have, and more and more and more people who never thought about this are going to start being affected. Maybe it's because of wildfires, maybe it's because of flooding, maybe it's because of other impacts. So for a policymaker on Capitol Hill, our core audience, that maybe a couple steps removed, because a lot of this stuff is regulated at the state level, what are the things they should be thinking about, and specifically, what are the kinds of things they need to learn about in order to be prepared to come up with something, whether it's a solution, or whether it's a strategy or something that helps. You know, one of the premises of insurance is that when you all band together, it's easier to survive the impact. And I feel like we may be headed somewhere with this, not just in terms of climate change, but also in terms of, like, insurance and the financial implications. So what, what other kinds of questions should policymakers be asking themselves, and what should they be on the lookout for going forward? 

Lisa: Yeah, good questions. I'm glad you mentioned flood insurance, because I was going to mention that as well, and it's another lesson that we've learned in this country, right? So I think we've learned by what California tried to do to promote equity and affordability, and we've learned that there's side effects to that, unintended consequences that maybe are not long-term desirable. So that was a bit of a course correct. And I think similarly, watching the National Flood Insurance Program go literally and figuratively underwater, we've learned a lot about what a government backed insurance policy can and can't do, right? So we learn, I think, from that example. I don't know if – we probably don't have time to really go into it – but we certainly learn that public funding to support and essentially subsidize flood insurance has some of the very same unintended and unwanted side effects as California's efforts, which is, on the one hand, it makes insurance affordable and available to people who live in high-risk areas. On the other hand, it continues to facilitate living in those high-risk areas and doesn't really disrupt the system in a larger way, and doesn't allow the accurate risk signal to be heard in ways that would move the markets and move migration patterns and move the housing system, etc. So as long as we are continuing to mute those signals, I think our system is going to continue to be really out of whack. So that's, I think, one takeaway. And I think the federal government has really learned this the hard way with the Flood Insurance Program, and they've made some tweaks to that program. I think that helps. So this isn't a yes or no question. This isn’t “get the government in” or “get the government out.” I think there are limited roles that are appropriate for the federal government, but as you say, insurance is regulated almost entirely at the state level in the US, but states also tend to pay attention to what their neighbors are doing, because they want to provide some sort of consistency for the markets and for companies to come in. So we're starting to see some things change at the state level. For example, California allowing catastrophe models. This is something that–and they picked up from their neighboring states who were doing this right so they were able to adopt this and it had already sort of been tried out. When we look at state level insurance regulations, a couple things that keep coming up that may have potential implications for the federal government are this desire to have a little flexibility to try some new and innovative insurance models. And so, for example, we've been talking to a lot of insurance companies about whether adding a parametric type of policy and layering that on to a traditional indemnity policy could potentially move the needle for some subset of people living in risk zones, including businesses and others. Parametric insurance works in a very different way from traditional indemnity insurance. So indemnity insurance is what most home insurance policies are. Your home will be insured for its estimated value, right? So if you have a $500,000 house, your home is insured for $500,000. When it burns down, an agent comes to your home, looks at the ashes, or reads the police report and says, “Okay, I have verified that you have suffered this loss. Here's the amount of your insurance,” and you get repaid. Oftentimes those monies are obligated. In other words, you have to rebuild, or you have to invest in a new home. You can't, sort of take the money and run. Sometimes you can, but oftentimes you can't. You have sort of these agreements about rebuilding. Parametric insurance works in a totally different way. There's no inspection of your property, and you're not insuring the property itself. What you're agreeing to is to get paid out when an index-a trigger point–has been reached. So for example, parametric insurance is really commonly used, and I've studied it in Africa for crops, for farmers, crop insurance, and for them, you can imagine an indemnity policy. Somebody would come out to their fields, look at what crops they had lost in a storm, and pay them the value of their loss. A parametric policy says, based on weather data, “We know if it rains more than–I'm going to make up a number–eight centimeters in 48 hours, most of our policy holders will lose their crops. We don't have to come inspect, we don't have to come value it. We have an agreement with you, you sign, and it says, ‘Whenever the rainfall exceeds eight centimeters in 24 hours, because that's what we've agreed upon as our trigger, you get paid.’” So there's a lot of advantages and there's some disadvantages to this type of policy, which is still not widely used in the US. The advantages are the transaction costs are really low. Nobody needs to come to your property, nobody needs to inspect, they just look at the weather station data and the payout is automatic. That keeps costs really low. So this type of policy is very, very affordable for a wide range of people, because it's priced to reflect low transaction costs. It also has an advantage, because you get that payout and it's not tied to anything. You can use that for whatever disruption you may have experienced. So if you experienced a rainstorm and that meant your power went out and you lost business, you can take your parametric policy payout and use it to make yourself whole in that way, and your indemnity insurance policy would sort of never touch those losses. The downside is we see a lot of what's called basis risk. So you can easily imagine, in the example I just gave, you're a farmer, big storm comes through, your crops are fine, actually, you survive it for whatever reason, you still get paid out because the trigger was hit. That's positive basis risk. You're not going to object to that. But the reverse happens, which is that it rains seven and a half centimeters, not eight. You lose everything, but the trigger wasn't hit. You don't get paid, so that's negative basis risk. So the accuracy problems make the trigger point really important, but what we find is that many state insurance offices don't even recognize parametric insurance as being an insurance policy that they can allow, and I don't think that's intentional. This is a poorly understood form of insurance. It's pretty new, but what we keep hearing from insurance companies is some states have more flexible regulations that give us a little room to play and try some of these innovative tools. Other states are very tight, and we don't really have any ability to try a new model, to think about taking on a certification program, for example, to think about adding a parametric policy, and, you know, there's some other ideas as well. So to the degree that the federal government has a role in governing and regulating state-level insurance policies, I think the federal government's role is one of enabler. And we talk a lot in sort of political science about enabling laws, enabling settings, and this is really a perfect example of how that works, which is that the federal government's job is mostly to stay out of the way, I think, for state-level insurance companies and just to make sure that laws and policies and regulatory systems at the federal level don't interfere with the way states want to move forward, ensure risk is being reduced, ensure companies are able to stay in the state and maximize insurability for their residents.

Dan B: This kind of reminds me, and please correct me if I'm wrong, this kind of reminds me of some of the conversations people were having around insurance after September 11 with terrorism risk insurance, where there was, all of a sudden this risk. No one knew what it was, but anyone with a tall building, anyone with a gathering of people was extremely worried that something terrible was going to happen, and, you know, it manifested itself in a really horrible way, and it caught everyone's attention. The risk had probably always been there, but there was a huge federal debate about terrorism risk insurance. And I grew up in Vermont, and I worked for a Vermont senator at the time, and Vermont has all sorts of unique insurance things like captive insurance and things like that. And I remember there was, like, a huge amount of discussion, and I remember learning an awful lot about insurance, because, you know, we had just really smart people in Montpelier who knew all about all of these very, I guess, exotic products that had, like, specific applications, extremely specific applications, and all of a sudden one of those specific applications was all over everywhere. Is that at all comparable to maybe the sea change that we're seeing here, where traditional insurance either isn't still up to the task without changes to the business model, or maybe it can't really continue to exist without these other kind of exotic models to kind of back everything up?

Lisa: Yeah, I think that's right. I don't know the 9/11 example specifically, but that sounds like it really matches this type of sort of moment in time in the insurance market where we think, just like you said, the way we've been doing insurance might not work anymore, and we've got, you know, cascading and compounding risks. You might be at risk for both a flood and a wildfire. How do you manage your insurance portfolio? How can you possibly pay for all that? And how can the companies provide people with stability and a buffer and not go broke themselves, right? How can we keep insurance companies alive? So it's quite complex. I imagine it's similar, and I can actually see a parametric-type policy working in a terrorism risk setting, because it's a good example, in the sense that if something happens, there's a terrorist incident, say, and you're not physically harmed, and your property isn't physically harmed, your life is still going to be really disrupted if you live nearby. So I can imagine a parametric policy that the trigger point is some type of disruption, maybe the power goes out due to a terrorist attack. If that happens, you'll get some kind of payout to help compensate you for the disruption. Because also, the problem with indemnity insurance is it only pays that one asset, and if you lost your whole home to a wildfire, your losses are much broader than your home, right? You've got a lot of other things that you've missed. You're missing your job, maybe your car went down, you know, I don't know. So parametric policies have a little bit more flexibility in how that money can be used.

Dan B: Lisa, this has been such an interesting conversation. Thank you so much for joining us today.

Lisa: Thanks so much for having me. It was a fun conversation.

Dan B: Alison, that was a super interesting conversation. Tremendous guest. I feel like I learned so much in such a short conversation. Really, really timely and like we were talking about, it's one of those things you don't think of until you need it, and if it's not there when you need it, things can get pretty catastrophic. I'm really curious how the business model evolves. It's something that underpins so much of what we do. People don't normally think about it, other than paying their premiums or, you know, watching ads during football games or whatever. It doesn't come up a lot, but the business model is just so established, and it has worked really, really well, and it's enabled us to have an extremely high quality of life. And you know, how are we able to evolve that business model? How are we able to find complimentary or alternative business models that allow us to maintain our standard of living? These are really, really interesting questions, and I really appreciated Lisa's point about states watching what each other's doing, right? We often talk about each state being like its own little laboratory of democracy, and that is exactly the case in insurance, where each state is kind of doing its own thing, and when when one of them comes up with a creative solution or an alternative, it is really interesting to see how that could get picked up or improved upon, like we saw with California and Lisa's example. So I'm sure this is something we're going to keep talking about. We've got the insurance briefing coming up on May 6 with Senator White House, and there's going to be more coverage of wildfire risk and flood risk and other types of risks that homeowners–as well as commercial properties. We didn't talk as much about commercial properties today, but certainly, anyone who has a structure, who does business, who has a livelihood, all of this stuff is going to, unfortunately, start to impact them more and more, and we have to ensure that that iInfrastructure is there to support them.

Alison: Yeah, I'm really grateful that Lisa was willing to come on the podcast today and talk about this topic that's really complicated, but that pretty much everyone needs to have some basic grasp on if they own a home or if they want to own a home, unless, of course, that rare case that she mentioned where you just have enough money lying around that you can buy a property outright and take on the risk if you really want to. Even in that situation, I imagine a lot of people would still want insurance. But I did want to mention we were talking mostly about the American West, and California in particular, for obvious reasons, they're really dealing with the brunt of it. But wildfires are becoming more common in places that they traditionally haven't been an issue. So for example, right now, wildfires in Wisconsin have doubled the state's average for this point in the year due to lower precipitation over the winter and reduced snowpack. So Wisconsin is a lot closer to the DC area, where we are, than it is to California. So that kind of hits home. And last year, Virginia was dealing with a lot of wildfires, not nearly the scope or scale of what they have in California, but still more than what we're used to. So I think people who don't really consider wildfires to be a problem for them right now still need to be keeping an eye on this issue and how it might change in the future. If you want to learn more about EESI's work on wildfires, head to our website at www.eesi.org Also follow us on social media @eesionline for all of our recent updates. The Climate Conversation is published as a supplement to our bi-weekly newsletter Climate Change Solutions. Go to eesi.org/signup to subscribe. Thanks for joining us and see you next time!