New research suggests that insurance could incentivize homeowners to take mitigative action and help prevent their neighborhoods from going up in smoke

Herndon, Va. (March 21, 2023) – California wildfires have destroyed entire neighborhoods, as hot embers fly on the wind from house to house. Preventative actions by homeowners – brush clearing, rooftop sprinkler installation, and fireproof construction or retrofitting – can lower the risk of wildfire damage and even stop fires from spreading.

A new study published in the journal Risk Analysis suggests that insurance discounts could encourage more California homeowners to take such mitigative actions, thereby lowering the risk of fire damage in vulnerable communities and reducing the financial costs that have driven wildfire insurance premiums beyond reach for so many.

Led by economist Howard Kunreuther, co-director emeritus of the Risk Management and Decision Processes Center at The Wharton School of the University of Pennsylvania, the study simulates the impacts of a wildfire spreading among homes in the densely populated neighborhood of Fountain Grove in Santa Rosa, California. Santa Rosa was the site of the catastrophic Tubbs Fire in October 2017, which took nine lives and destroyed 3,043 homes. Likeso many California communities, Fountain Grove is situated at the wildland-urban interface, where houses are built in close proximity to flammable vegetation on unoccupied land. Kunreuther and his colleagues developed a model that incorporates the cost, private benefits and total benefits from mitigative actions, then illustrated it with simulations based on real-life parameters of wildfires in Fountain Grove. This allowed them to estimate the impact of mitigation on a neighborhood as a function of the distance between houses. Their analysis described improved combinations of homeowner behavior, insurance firm policies (like premium discounts), state regulation of insurance coverage and premiums, and community regulation of mitigation and building density.

In their paper, the authors argue that the “maximum marginal benefit” can be a guide to achieving optimal wildfire mitigation in a community. That marginal benefit is similar to “herd immunity” in models of contagious diseases like COVID-19. In other words, what percentage of homes in a neighborhood must be mitigated to hit the point at which fire can no longer spread from house to house in a neighborhood?

The study shows that communities with denser housing benefit the most from mitigation, as more houses will burn when they are tightly packed. Specifically, in their example the analysis determined that a neighborhood with homes that are only 4-6 meters apart can achieve the maximum marginal benefit if 35 to 60 percent of homeowners take mitigative action.

The authors argue that insurance is an economic incentive for promoting this optimal community-level mitigation. “When it comes to a low probability, high consequence event like a wildfire, one of the reasons people don’t take precautions is because they think ‘it’ll never happen to me’” says Mark Pauly, a healthcare economist at The Wharton School and co-author of the study. “If there is a discount attached to your insurance, and it is more than the cost of mitigation, it provides incentive for people to mitigate. The result of that is less total damage and less total cost to the community. And you can see those savings because the insurance discount for mitigation will exceed the cost of mitigation.”

The research is particularly timely. Last year, the state of California passed a new regulation that requires insurance companies to award premium discounts to consumers and business owners who take wildfire safety and mitigation actions under the state’s 2022 “Safer from Wildfires” framework.
“Our results provide quantitative data to help regulators and insurers determine what the discount should be, who should get it, and for what types of mitigation,” says Pauly. “Unlike proprietary models used by insurance companies, our model is simple and transparent.”


About SRA
The Society for Risk Analysis is a multidisciplinary, interdisciplinary, scholarly, international society that provides an open forum for all those interested in risk analysis. SRA was established in 1980 and has published Risk Analysis: An International Journal, the leading scholarly journal in the field, continuously since 1981. For more information, visit www.sra.org.