The Impact of Wildfires on Arizona Real Estate and Insurance
The Impact of Wildfires on Arizona Real Estate and Insurance
By Derek Kartchner | Gila Insurance
The Camp Fire of 2018 (18,804 structures and $10.75 billion in insured losses), the Tubbs Fire of 2017 (5,636 structures and $9.56 billion in insured losses), and the Thomas Fire of 2017 (1,063 structures and $2.47 billion in losses) significantly changed the insurance landscape in Arizona. While these fires didn’t occur in Arizona but in California, their impact on insurance and real estate markets in Arizona has been profound. These events highlighted that the risk modeling used by insurance carriers for wildfires was flawed and that urban sprawl had encroached into high-risk areas. As a result, reinsurance companies (the entities insurers rely on to manage their risk) began taking a closer look at wildfire exposure and implementing measures to mitigate their losses. Unfortunately, these efforts have sometimes been drastic, and in certain cases, counterproductive, affecting the real estate market in Arizona.
Insurance companies, being profit-driven entities, seek to balance risk and reward. While it may be frustrating to deal with high premiums and deductibles, the value of insurance becomes clear when a $400,000 house is reduced to ashes. In fact, it can seem like a bargain at that point. Insurance companies have two main levers to maintain profitability: rates and underwriting. While rate increases need approval from the state Department of Insurance, underwriting allows companies to select risks that they believe will be profitable. This process involves analyzing various factors, such as the likelihood of a claim being filed, the condition of the home’s systems (plumbing, electrical, HVAC, roof), and external risks like wind, hail, tornadoes, hurricanes, and wildfires. While Arizona avoids many of these natural disasters, wildfire risk has spooked insurance carriers into taking drastic actions.
Yes, Really.
For example, I recently read an article titled, “Colorado Fire Department Denied Insurance Because of Fire Risk.1” After months of searching, the Durango, Colo., Fire Department was unable to find a company willing to provide an affordable policy to cover its new firehouse construction. Arizona isn’t Colorado, but it does have the largest ponderosa pine forest in the world. Areas like Prescott, Flagstaff, Payson, Show Low/Pinetop, and others are becoming nearly uninsurable. While it’s still possible to find coverage, I’ve seen premiums as high as $26,000 to $40,000 a year. In one case, I received a quote of over $100,000 per year for a property in a wildfire-prone area. Yes, you read that right.
“But I don’t have a home in Northern Arizona,” you might say. While that’s good, it doesn’t mean you're unaffected. Why? Because much of the area north of the 101 in Scottsdale is considered "very high" risk. Cave Creek, Paradise Valley, and Apache Junction are similarly classified. In Tucson, areas like Oro Valley, everything north of River Road, west of I-10, and north of Prince Road, along with everything east of Houghton, are also in the "extreme" wildfire risk zone. This data is from government sources2, but insurance carriers will likely take an even more cautious view.
Mitigation and Planning
To reduce risk, many investors are adopting wildfire mitigation strategies, such as creating defensible space by removing flammable vegetation, installing fire-resistant building materials, and adhering to local fire safety regulations. While these measures can help lower insurance premiums and reduce the risk of property damage, they come with upfront costs that investors must factor into their budgets. Additionally, investors should stay informed about state and community efforts, as this is likely to become a major issue for policymakers moving forward.
Conclusion
In conclusion, wildfires in Arizona present significant challenges for real estate investors, especially regarding affordable insurance and long-term risk management. By understanding the potential impacts of wildfires and implementing proactive strategies, investors can better navigate these challenges and make informed decisions in this increasingly complex market. These issues are unlikely to disappear anytime soon.