DOI: 10.4324/9781003157571-12
9 Is fire insurable?
Insights from bushfires in Australia
and wildfires in the United States
Kenneth S. Klein
Fire and insurance have been conjoined for a very long time. On 2 September
1666, the Great Fire of London began. Estimates are that when the fire was
done four days later, 70,000 of the City’s 80,000 inhabitants were homeless.
And at least myth – perhaps reality – has it that in the immediate next several
years, out of the ashes of that fire the idea of the first fire insurance company
germinated to fruition in the mind of Nicholas If-Jesus- Christ-had-notdied-for-thee-thou-hadst-been-damned Barbon (James 1954, pp. 44–45). In
the following 450+ years, fire and insurance have taken a journey together
in an inter-relationship that continues to evolve.
Today, most homeowners want full and adequate fire insurance, are
willing to pay for it, think they have it, and yet do not. Whether ‘bushfire’ in Australia or ‘wildfire’ in the United States, the frequency, intensity,
and economic impacts of catastrophic fire events are increasing. The State
of California, for example, now essentially has a year-round fire season
(CalFire 2021). And the consequence is that dwelling insurance is becoming
less affordable, less available, and less adequate. Ubiquitously affordable,
adequate, available dwelling insurance is an aspiration that seems more
remote now than ever, and yet also more necessary than ever.
Homeowners want to and think they have fully
insured their dwellings for fire
Homeowners want to fully insure their homes, and until disaster strikes,
think they have done so. It is postulated that one reason, ‘individuals do
not buy insurance is that they perceive the probability of a loss to be below
their threshold level of concern so that the benefits of insurance exceed the
associated premium and search costs’ (Kunreuther 2018, p. 143). Depending
upon the theorist, this sometimes may be described as an adverse selection
problem, or price elasticity. Taken out of economics jargon, it is theorising
that one reason there may be uninsureds or underinsureds is that individuals do not want to share the cost of someone else’s risk.
The theory is intuitively plausible, but apparently at least for homeowners deciding about insuring their dwellings for fire, the theory is wrong.
9 Is fire insurable?
Insights from bushfires in Australia
and wildfires in the United States
Kenneth S. Klein
Fire and insurance have been conjoined for a very long time. On 2 September
1666, the Great Fire of London began. Estimates are that when the fire was
done four days later, 70,000 of the City’s 80,000 inhabitants were homeless.
And at least myth – perhaps reality – has it that in the immediate next several
years, out of the ashes of that fire the idea of the first fire insurance company
germinated to fruition in the mind of Nicholas If-Jesus- Christ-had-notdied-for-thee-thou-hadst-been-damned Barbon (James 1954, pp. 44–45). In
the following 450+ years, fire and insurance have taken a journey together
in an inter-relationship that continues to evolve.
Today, most homeowners want full and adequate fire insurance, are
willing to pay for it, think they have it, and yet do not. Whether ‘bushfire’ in Australia or ‘wildfire’ in the United States, the frequency, intensity,
and economic impacts of catastrophic fire events are increasing. The State
of California, for example, now essentially has a year-round fire season
(CalFire 2021). And the consequence is that dwelling insurance is becoming
less affordable, less available, and less adequate. Ubiquitously affordable,
adequate, available dwelling insurance is an aspiration that seems more
remote now than ever, and yet also more necessary than ever.
Homeowners want to and think they have fully
insured their dwellings for fire
Homeowners want to fully insure their homes, and until disaster strikes,
think they have done so. It is postulated that one reason, ‘individuals do
not buy insurance is that they perceive the probability of a loss to be below
their threshold level of concern so that the benefits of insurance exceed the
associated premium and search costs’ (Kunreuther 2018, p. 143). Depending
upon the theorist, this sometimes may be described as an adverse selection
problem, or price elasticity. Taken out of economics jargon, it is theorising
that one reason there may be uninsureds or underinsureds is that individuals do not want to share the cost of someone else’s risk.
The theory is intuitively plausible, but apparently at least for homeowners deciding about insuring their dwellings for fire, the theory is wrong.