Optimal wildfire insurance in the wildland-urban interface in the presence of a government subsidy for fire risk mitigation

Mariam Lankoande, Jonathan Yoder () and Philip Wandschneider ()

No 2005-9, Working Papers from School of Economic Sciences, Washington State University

Abstract: We investigate the effectiveness of a government subsidy and mitigation based insurance contracts at discouraging migration into the wildland interface and at inducing incentives for risk mitigation. We construct a model of the individual migration decision, where the individual maximizes expected utility defined over attributes of locations including cost of insurance and mitigation, wildfire damage, and the availability of a subsidy for reducing wildfire risks through fuel management. Our analysis shows that standard insurance policies provide inefficiently weak incentive for wildfire risk mitigation by offering a low insurance premium to high-risk landowners. We find on the other hand that in the presence of optimal government subsidy, contingent contracts provide an efficient solution where a homeowner chooses a mitigation level that maximizes social benefit and insurers provide actuarially fair contracts such that each individual is offered a premium of the exact value of her wildfire risk.

Keywords: Insurance; Insurance Companies, Government Policy and Regulation, General, Government Policy (search for similar items in EconPapers)
JEL-codes: G22 G28 Q20 Q28 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2005
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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