Wildfires in California: A Growing Residual Market?

We may be seeing the emergence of yet another residual market for insurance, this time against wildfire. Even though fires have declined a great deal in the United States–and really don’t pose a social problem anymore–the wildfire probelm has gotten worse. Particularly in California, many people, most of them rich, have taken to building homes on wooded hillsides. In the dry environment, these hillsides can become fire traps. As a result, the Associated Press reports, companies are getting tougher about writing policies and even withdrawing from some markets altogether. Unlike hurricane zones–which contain lots of lower-income people who may not have the means or ability to leave in the short term–I’d have to think that just about anyone who builds a home on a California hillside has plenty of money.

It seems to me that it’s fine for the insurance companies to raise rates and/or require more mitigations, particularly if the risk of wildfire is growing. Since building on hillsides also tends to promote errosion–an externality–I’d be very cautious of any effort to make sure that rates remain “reasonable” or to establish any sort of residual market for insurance against wildfires.