Economic Impacts of Wildfire Risk
Paper Session
Sunday, Jan. 9, 2022 10:00 AM - 12:00 PM (EST)
- Chair: Judson Boomhower, University of California-San Diego and NBER
Building Codes and Community Resilience to Natural Disasters
Abstract
Natural disaster losses can be mitigated through investments in structure hardening. When property owners do not correctly perceive risks or there are spatial externalities, it may be beneficial to mandate such investments through building codes. We provide the first comprehensive evaluation of the effect of California's wildfire building codes on structure survival. We combine administrative damage data from several states, representing almost all U.S. homes destroyed by wildfire since 2007. We merge this damage data to the universe of assessor data for destroyed and surviving homes inside wildfire perimeters. There are remarkable vintage effects in resilience for California homes built after 1995. Using differences in code requirements across jurisdictions, we show that these vintage effects are due to state and local building code changes prompted by the deadly 1991 Oakland Firestorm. Moreover, we find that these improvements increase the survival probability of neighboring homes due to reduced structure-to-structure spread. Our results imply that property losses during recent wildfire seasons would have been several billion dollars smaller if all older homes had been built to current standards.Efficiency and Equity Implications of Wildfire Insurance Reform in California
Abstract
The economic impacts of mounting wildfire risk are particularly salient in California’s property insurance industry. This is also an industry where advances in state-of-the-art wildfire risk modeling could have profound policy implications. Under the current regime, insurance companies must base premiums on realized loss history rather than the probability of future loss. This approach can generate misleading estimates of true wildfire risk vis-à-vis probabilistic modeling approaches, especially in the context of rapidly worsening risk over time. We consider the impacts of proposed regulatory changes that would allow greater use of probabilistic catastrophe models in pricing homeowners insurance in this heavily regulated market.With California’s quickly changing wildfire risk profile, requiring insurance rates to be based on historical losses may prevent insurance rates from reflecting true wildfire risk exposure. Such distortions may limit the availability of homeowners insurance in high-risk areas. We aim to characterize both the efficiency and equity implications of allowing more complex risk modeling in the calibration of wildfire insurance premiums. Specifically, we consider the economic impacts of growing wildfire risk for insurers and policyholders in wildfire-prone areas; the adequacy of regulated insurance rates to cover expected losses under current regulation; the degree to which present regulations may reduce access to homeowners insurance in high-hazard areas; and regulatory reforms that could strike a better balance between policy objectives of affordability, availability, and industry solvency.
Local Economic Impacts of Wildfires
Abstract
As large and damaging wildfires have increased in frequency in the western US, the consequencesof these events for local economies remain largely unknown. Previous studies of the effects of natural
disasters on local economic growth have yielded mixed results, and few studies have examined
wildfires—especially large and damaging wildfires. In this study, we investigate the local economic
impacts of wildfires in the western US using two empirical approaches, which make use of public
county-level economic data and administrative establishment-level data, respectively. Results indicate
that large wildfires that affect populated areas have positive short-run effects on county-level
employment growth, especially within the construction sector, but zero effects beyond a year and a
half after the fire. Preliminary results with establishment-level data show that establishments near
(within 10 km of) selected large and damaging wildfires were less likely to have survived two years
after the fire than establishments located farther away.
Discussant(s)
Lint Barrage
,
University of California-Santa Barbara and NBER
Matthew Gibson
,
Williams College
Edward Rubin
,
University of Oregon
Katherine Wagner
,
Stanford University and University of California-Berkeley
JEL Classifications
- Q5 - Environmental Economics
- R0 - General