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Despite Hefty Payouts, Fire Insurance Costs Hold Steady

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Wildfires have already destroyed hundreds of homes in the American West this year. The insurance industry is once again poised pay out hundreds of millions of dollars to cover those losses, as it already has for homeowners who lost their houses during last year's fire season.

When the Waldo Canyon fire, the most destructive in Colorado's history at the time, roared into C.J. Moore's neighborhood last summer, she knew her home didn't stand a chance. The fire leveled Moore's home and 345 others around it.

"These houses did not burn, they exploded," she says. "It was like somebody set a bomb off in the interior. I mean, it wasn't a case of the roof caught on fire and then the house burned. Unh-uh. They literally incinerated."

Fast-forward a year, and her neighborhood on the western edge of Colorado Springs is a flurry of reconstruction. Moore and most of her neighbors had good insurance and pretty much everything is being replaced.

"They're building the deck now, which will be fabulous," Moore says. "My behind neighbors, they're about to stucco their house. So it's gonna turn back into the neighborhood again."

Rebuilding Despite Fire Risk

Insurance companies are paying to rebuild hundreds of homes in an area proven to be at high risk for wildfires. Even so, the premiums to insure those homes are unlikely to change much.

The fact is, for insurance companies, wildfires aren't that big a deal compared to say, tornadoes or hurricanes. And even in fire-prone Colorado, hail is still responsible for more actual insured losses than fire. One hail storm over the Denver area in July 2009 led to almost $790 billion in insurance claims (approximately $820 billion in 2012 dollars) — about double what the Waldo Canyon Fire cost.

"We are in hail alley, so still our most expensive catastrophe is hail," says Carole Walker, executive director of the Rocky Mountain Insurance Information Association, an industry trade group. While images of wildfires are dramatic, Walker says they still affect relatively small areas.

Still, the recent catastrophic wildfires are causing insurance companies to get tougher. Companies are starting to ask homeowners in the woods to do more before they get a policy issued or renewed.

"When it comes to wildfire, and they're looking at that risk, we know with wildfire, there is much we can do to be able to make those properties safer," Walker says. "The science shows us that, with the defensible space, the proper building materials, with fuels away from the home, that those can go a long way to saving a home."

Insurers Pay For Homes, Government Pays For Firefighting

But broadly, the risk calculation the insurance companies are making is skewed by one major thing: Local, state and federal agencies respond to, fight and stop almost every wildfire — and literally thousands ignite every year. Only a tiny fraction ends up damaging property.

Take June's huge Black Forest Fire, also near Colorado Springs. More than 500 homes were destroyed, but several thousand more were saved.

"Insurance is based on risk, and your risk is reduced when the cost of defending the homes is paid for by somebody else," says Ray Rasker, executive director of the Montana-based think tank Headwaters Economics.

By "somebody else," Rasker means taxpayers. Last year alone, the U.S. Forest Service budgeted roughly $1 billion for wildfires. The bulk of that money went to battle blazes that threatened homes and cities.

"And it's not until we start shifting that cost responsibility more to the local level, that we're going to see a change in the pattern of where people build homes," Rasker says.

Or rebuild them after the fires. Until a county or a city has to absorb some of the true costs of building in the woods, Rasker says, nothing is going to change. And the insurance industry will keep writing policies for people who want to live there.

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