The Economics of Wildfire

The Economics of Wildfire 

11 July 2013

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USA — Andi O’Conor was on a kayaking vacation in Washington State in September 2010, while 1,500 miles away her home in Boulder, Colo. was burning to its foundation in the Fourmile Canyon wildfire. The fire, which burned in the Colorado foothills over four days, eventually took 168 homes at a cost of $217 million in insurance claims to become the state’s costliest wildfire to date, an “honor” that was passed to the $352-million Waldo Canyon Fire outside of Colorado Springs in 2012.

O’Conor lost nearly everything, save for her dog and the gear she brought on her trip, but says she never questioned her decision to return home and rebuild.

“I love living out of town in the wilderness a little bit,” she says now from her new, slightly smaller home on the same site. “It’s 15 minutes to town and you get space, I have three acres, so that’s kind of what drew me up here. It was just an adventure. Living in the mountains is an adventure, especially in the winter.”

But dealing with the ins-and-outs of a major insurance settlement turned out to be a nightmare, especially since O’Conor’s home was woefully underinsured, leaving her more than $150,000 short on the rebuild (including more than $36,000 in demolition costs). The problem, she says, is that homeowner’s insurance is generally calculated based on national averages and general trends without taking local economics and building costs into account, which in Boulder’s rugged foothills run well above average. When she rebuilt, O’Conor met with a local builder to get a real-world replacement cost for the Boulder market, and found herself nearly underinsured for a second time.

Of course, O’Conor was far from alone. Of the 168 homes that were destroyed by the Fourmile Canyon fire, only 55 of them have been rebuilt as of summer 2013, with another 65 permits outstanding. Insurance settlements are generally only available for two years after a disaster, so it would appear that just over 70 percent of O’Conor’s neighbors, at most, are prepared to resettle in the area.

“It’s an incredible amount of financial management,” O’Conor says of the $600,000 settlement she eventually received from her insurance company, “and few of us have ever had to manage anything like it. It’s huge, it’s really huge. People have a lot of misconceptions that they’re going to hand me a big check and I can build a beautiful new house, but people don’t really think through the big picture of loss financially and emotionally. The financial impact goes well beyond rebuilding and almost nobody comes out ahead. I haven’t spoken to one person — wealthy, poor, in a beautiful house, or a funky shack – who came out ahead. Everyone loses.”


Beauty at a cost

And, when it comes to wildfire, so does the federal government.

According to public records, the U.S. Forest Service and the Department of the Interior spent more than $2.8 billion on wildfire management in 2012, and the two agencies are forecast to spend more than $3.5 billion on such costs in 2013 (before cuts associated with the federal sequester are taken into account). That is up dramatically from 1994, when the Forest Service and Interior appropriated just over $1 billion, combined, for wildfire management. The high watermark remains 2008, when federal wildfire spending reached $4.46 billion, including extra emergency funds for record-setting that year.

In 2012, the federal government spent roughly $1.27 billion on preparedness efforts (which includes equipment, training and baseline personnel), $807 million on fire suppression, $495 million on hazardous fuel removal and another $140 million on miscellaneous costs. Also, since 2010, both the Forest Service and the Department of the Interior have been contributing an average of $410 million per year, combined, to what’s known as the FLAME Wildfire Suppression Reserve Subaccount, which is used primarily for wildfire responses on public lands and the protection of what the government terms “critical ecosystems.”

These days, nearly half of the Forest Service’s annual budget goes to fire suppression costs, along with roughly 10 percent of the Department of the Interior’s budget for all of its associated agencies.

As for the states, wildfire spending depends in large part on location. A 2008 on Montana, for example, found that the state was spending on average about $28 million on wildfire suppression annually; the same study also predicted that those costs will likely reach $40 million by 2025. And in Oregon, a state that saw 1.26 million acres burned by wildfire in 2012, it costs state agencies roughly $57,000 to protect each house in high fire danger areas.

A growing trend?

The problem for policymakers is that today’s fires are getting bigger. Nine of the top 10 largest fires by acre in the U.S. have occurred in the last decade, led by the 2004 Taylor Complex fire in Alaska that burned 1.3 million acres, according to the National Interagency Fire Center. That’s larger than the entire state of Delaware. And 9.3 million acres burned in total during the 2012 wildfire season, making it the third-largest season in terms of acre-damage since 1960.

The number of wildfires every year has generally trended down over the years – in 1985, about 82,500 fires nationwide burned some 2.9 million acres; in 2012, 67,700 fires burned more than 9 million acres — but it’s those big monster events that are becoming more and more common, and more costly.

“If you think about the trajectory that we’re on right now, with more and more people wanting to live in the woods, with a warming climate, and a lot of fuel buildup from past management practices, it’s a tinderbox,” says Ray Rasker PhD, executive director of Headwaters Economics, a Montana-based research firm specializing in land management issues of the western states. “The conversation needs to move on from suppression to preventing these fires from happening.”

The really alarming part, Rasker says, is that only 16 percent of the high fire risk land in the US currently has homes on it, meaning that the other 84 percent is still open for future development.

“They’re doing a lot of clearing (of deadwood) from the wildland fire interface, which is a good thing to do,” he says. “But they’re also doing less controlled processes, whether through thinning or prescribed burns. Those practices are becoming a lot harder to do and agencies have limited money, limited staff and are being forced to defend homes more often. So, as a result, the amount of fuel keeps build and building.”

Should homeowners be footing more of the bill for protecting their homes? Should the local governments that permit these developments in high-risk areas be paying? Those are discussions worth having, Rasker says.

Insuring a high-risk home

Of course, homeowners in high-risk areas are not entirely out of the picture.

“When you buy a house in an area like this,” explains Tully Lehman with the Insurance Information Network of California, “it’s all about location, location, location. What is the fire risk in your area? How can you limit that risk? Insurance does cover this type of peril, but obviously if the risk is higher it will cost more to insure a home than it would in an area where the risk is lower.”

Insurers in high-risk states like California have done a good job of managing the state’s wildfire risk, he says, at least from a personal property standpoint, though he does admit that some insurers have actually pulled out of certain parts of the state where devastating wildfires are becoming more common. In 2003, about 19,000 wildfire-related homeowners insurance claims resulted in about $2 billion worth of payouts, while the 1991 Oakland Hills fire near downtown Oakland, Calif. cost insurers more than $2.5 billion in inflation-adjusted 2013 dollars.

“Here in California, obviously what we see is that wildfires can be extremely costly,” Lehman says, “but the insurance industry has been able to weather them in the past and will be able to continue to do so.”

That may not be the case everywhere, however. In Colorado, Carole Walker with the Rocky Mountain Insurance Information Association says that insurance companies are getting picky about what structures they’re willing to insure, and are crafting strict new fire prevention regulations for homeowners in high-risk areas, calling for fire-retardant building materials and large defensible spaces around the home.

“Up until a couple of years ago we didn’t have that mega-destructive type of fire out here,” she says, adding that the 2002 Hayman fire, which burned 138,000 acres and remains the largest wildfire in the state’s history, only resulted in about $31 million worth of property losses. “Now what were seeing play out in Colorado, unfortunately, is multimillion dollar wildfires destroying hundreds of homes. Customers who are not willing to take steps to protect their homes are having a harder and harder time getting coverage.”

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