Role of insurance in wildfire risk mitigation

Devika Hazra and Patricia Gallagher

Economic Modelling, 2022, vol. 108, issue C

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.

Keywords: Insurance premium; Wildfire; Risk mitigation; FAIR Plan; Home insurance (search for similar items in EconPapers)
JEL-codes: Q51 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:108:y:2022:i:c:s0264999322000141

DOI: 10.1016/j.econmod.2022.105768

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