Regulatory challenges are adding to insurer woes as the frequency and severity of wildfire grows, especially in California, the New York-based Insurance Information Institute (III) says.

The cumulative effect of various regulations may be creating an unsustainable financial environment for firms insuring property in high-risk areas because they cannot accurately price risk, some stakeholders say.

California’s Department of Insurance prohibits property insurers from using either the cost of reinsurance or catastrophe models when setting property premium rates. Insurers are often required to instead rely only on their own historical loss data to set prices, regardless of what the anticipated future risk might be.

“This could result in under-pricing of wildfire risks in some areas, since there might be as yet little historical loss data for catastrophic losses – even in high-risk areas,” the Institute’s new white paper, Fighting Wildfires with Innovation, says.

The wildfire paper is the first in a series and includes charts illustrating how states such as Arizona, Colorado, Idaho, Montana and Texas also face extreme wildfire risks.

The III estimates claim payouts from the Camp Fire in California, which began on November 8 last year, will total anywhere from $US8.5 billion ($12.33 billion) to $US10.5 billion ($15.23 billion), when all related claims from insured auto, residential and commercial property are paid.

“The wildfires we’ve seen in recent weeks make these findings all too real and timely,” III CEO Sean Kevelighan said. “The increased severity of these wildfires stems in part from too many people residing in harm’s way.

“Builders and residents need to focus on how to be more resilient, or reconsider altogether whether to place homes in certain areas.”

Building codes that incorporate fire-resilient construction, such as fire-resistant roofs, can help protect new housing stock from wildfire damage, the III states. Insurers are encouraging US customers to harden their homes by installing Class A fire-rated roofs, metal screens which cover all vents, and double or multi-paned tempered glass windows.

An estimated 51% of houses in Paradise, California, built with the state’s updated 2008 building codes survived last year’s Camp Fire, while only 18% of houses without the updated codes survived.