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America on Fire: Climate Change, Wildfires and Insuring Natural Catastrophes

Christopher C. French

Vol. 54

December 2020

Page 817

America is on fire. The damage, destruction, and loss of life caused by wildfires have exploded over the past few decades. Nine of the ten worst fire seasons have occurred in the past fifteen years, with 2017 and 2018 being the worst years ever. Despite spending approximately $3.7 billion annually on fire suppression, more than 35,000 structures were lost to wildfires in 2017 and 2018, approximately $32 billion in property losses occurred, and more than 100 people were killed. More than forty million homes worth approximately $187 billion in the U.S. are currently at a high risk of destruction due to wildfires. In response to this crisis, the insurance industry has been dropping customers and refusing to insure homes that are considered at high risk for wildfires, while also excluding coverage under homeowners policies for other natural catastrophes such as floods and earth movement. As a result, natural catastrophes are largely uninsured in America today.

This Article discusses the causes of the wildfire crisis, including climate change, and ways to mitigate the crisis. It also analyzes the current insurance market for wildfires and other natural catastrophes in America. In doing so, it explores how other developed countries, such as Australia, Belgium, France, New Zealand, Norway, Spain, and Switzerland, insure natural catastrophes. It concludes by seeking to transform the insurance market in America for natural catastrophes by proposing the creation of a governmental insurance program that “bundles” coverages for natural catastrophes together in a single policy. Bundling the coverages would solve the correlated risk, adverse selection, and moral hazard problems that have driven private insurers from the insurance market for natural catastrophes and plague insurance programs that cover only a single catastrophic peril, such as the National Flood Insurance Program.

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