The crucial role of insurance in managing wildfire risks

The frequency and severity of weather-related hazards including storms, floods and wildfires has increased dramatically in recent years. The devastating wildfires in Southern California which started in early January 2025 are but the latest example, with direct economic losses already  estimated at more than USD 60 billion along with loss of life and other devastating impacts.

By protecting people against the financial impacts of these weather-related hazards, the insurance sector plays a critical role in helping impacted households and businesses recover and rebuild. The pricing that insurance and reinsurance companies apply to coverage can also provide important risk signals and incentives for risk reduction and adaptation.

However, increasing climate-related damages and losses are challenging the ability of insurance companies to offer affordable coverage against weather-related hazards. 

The impact of climate change on the sustainability of insurance markets is most visible in the context of wildfire risks. Unlike other natural hazards, coverage for damages and losses from wildfire is almost always included in the property insurance policies required for securing mortgage financing from banks.

Changes in rainfall patterns, temperatures and storm activity, along with significant population growth in the wildland-urban interface have led to an increase in the frequency, size and severity of wildfires in many regions across the world. Average annual economic losses from wildfires more than tripled from USD 2.9 billion in 2000-09 to USD 10.5 billion in 2014-23. 

Source: OECD calculations based on data provided by Swiss Re (Swiss Re, sigma database. All rights reserved.)

As a relatively high share of wildfire losses are insured (approximately 60% in 2014-23), insurance markets in some highly exposed regions have faced significant stress, including large increases in premium costs and withdrawals of coverage capacity. For many high-risk households and businesses, insurance coverage has become either unaffordable or unavailable. 

Wildfires and other climate-related hazards will become more frequent, destructive, and unpredictable. The growing scale of these disasters requires that policy makers rethink strategies for building financial resilience to climate risks across all segments of society, with a particular focus on investing in risk reduction and adaptation. Investing in risk reduction and adaptation will be the only sustainable means to address the increasing financial costs of these disasters for households, businesses and government at all levels, and maintain the availability of affordable insurance coverage for climate risks.

Insurers are integral to climate and wildfire risk management in two key ways:

1. Risk assessment and mitigation: By analysing data on climate and wildfire risks, insurers  encourage preventive actions through risk-based pricing and premium discounts for mitigation efforts that effectively reduce the impacts of disaster.
2. Financial resilience: Insurance helps communities recover more quickly after disasters, spreading economic losses and reducing reliance on public funds.

The OECD report "Enhancing the Insurance Sector’s Contribution to Climate Adaptation" offers important insights and actionable recommendations for policy makers on how to enhance the insurance sector’s role in supporting risk reduction and adaptation in particular.

Several barriers impede the role of insurance in protecting against climate and wildfire risks:

• Affordability and accessibility: As climate and wildfire risks grow, insurance premiums rise, making coverage unaffordable or unavailable for many homeowners and businesses.
• Inadequate risk mitigation: Public and private investments in risk reduction and adaptation often fall short, increasing the impact of storms, floods and wildfires.
• Data gaps: Limited access to accurate, climate-conditioned data on weather-related risks hampers effective investment in risk reduction and adaptation and accurate insurance underwriting and risk assessment.

To address these challenges, government at local and national level must take decisive action to strengthen the link between insurance and climate resilience:

1. Implement risk reduction and adaptation measures

Governments can work with insurers to promote risk reduction and adaptation strategies. In the context of wildfires, this could include:

• Enforcing stricter building codes that require fire-resistant materials
• Supporting vegetation management programmes and creating defensible spaces around properties
• Offering subsidies or tax incentives for households and businesses to invest in fire-resistant practices

2. Enhance data sharing and risk modelling

Governments should foster collaboration between insurers, scientists, and public agencies to improve wildfire risk assessments. Access to accurate, up-to-date data can inform both insurance pricing and land-use planning, ensuring that risk is managed effectively at all levels.

3. Expand access to insurance in high-risk areas

In regions where wildfire risks are high, governments can support insurance availability through catastrophe risk insurance programmes or public-private insurance programmes that support affordability through risk sharing and ensure coverage is available to those at risk.

4. Integrate climate adaptation into broader policy frameworks

Policy makers should embed wildfire risk management into climate adaptation strategies, ensuring that land-use planning, emergency response, and insurance policies are aligned.

5. Leverage insurance to drive resilience

Insurance mechanisms should be designed not only to transfer risk but also to incentivise resilience. For example, offering lower premiums for properties built or retrofitted with fire-resistant features can encourage widespread adoption of mitigation practices.

The rising threat of wildfires and other climate risks demands a proactive approach to risk management, with insurance serving as a cornerstone of resilience. However, the challenges posed by escalating risks require a concerted effort by policy makers to ensure that insurance remains accessible and affordable - and encourages the investments in risk reduction and adaptation that are needed to ensure the long-term sustainability of insurance markets. By implementing the OECD's recommendations—such as promoting risk reduction, improving data sharing, and fostering public-private insurance programmes—governments can build a more resilient future where communities are better protected against the growing menace of wildfires.

For more insights on this topic, explore the full OECD reports on Enhancing the Insurance Sector’s Contribution to Climate Adaptation and on Building Financial Resilience to Climate Impacts. We invite you to explore additional OECD work on insurance.