Do Insurance Premiums Put the Fire Out? Evidence from Los Angeles

Abstract

This paper investigates the effectiveness of home insurance policies in light of the relationship between home insurance premiums and risk from fire hazards. We analyze the relationship between home attributes, with a focus on hazard class, and insurance premiums. In addition, it presents a comparative analysis of the extent to which these factors contribute to FAIR plan premiums vis-a-vis other voluntary market insurance premiums across Los Angeles County from 2011 through 2016. The estimation results of regression analysis indicate that hazard class has a relatively greater impact on insurance premiums for FAIR plan compared to other voluntary market insurance. However, an Extra Trees classifier model demonstrates that the relative importance of wildfire risk is significantly smaller for both types of insurances when compared to other home attributes. Interestingly, with increase in average income, the premium pool for FAIR plan decreases while that for voluntary market insurance plans increases. Among the other socioeconomic factors, unemployment rate, poverty rate, education level and median age, have similar impact on both FAIR plan and other insurance plans. Recommendations include modifying current fire insurance practices to assist in ushering homeowners away from hazardous areas.

Keywords: Insurance Premium, Hazard Class, Wildfire Risk, FAIR Plan, Voluntary Market Insurance

JEL Classification: R26, Q21, Q28