Wildfires are costly events that severely impact communities and lead to significant economic losses. They are also expected to become more frequent due to climate change. While some wildfires occur naturally, the US National Park Service estimates that 85% of all wildfires are caused by human activity. Additionally, a 2022 report from the California State Auditor found that about 10% of wildfires in California from 2016 to 2022 were linked to electrical power generation.
Over the past decade, electric utilities — essential companies that provide power to industry and communities, large and small — have been held liable for causing wildfires that resulted in massive losses. In response to the increasing wildfire risk and the critical role utilities play in daily life, many states in the US have proposed bills or enacted laws that affect the liability these utilities face when they are responsible for wildfires.
As public utilities, energy companies, and state governments navigate these legislative changes, it’s critical to utilize actuarial services to establish effective risk management, forecast potential liabilities, and institute funding models. This approach can help ensure financial stability during these challenging times.
Our report, “Wildfire Risk Management And Financial Forecasting”, reflects on common causes and impacts of wildfires over the past 10 years and presents an overview of recent laws and pending legislation in 2025. We also explore wildfire exposures and the potential liabilities for utility companies, and offer effective risk management solutions to mitigate this risk.
This article kicks off an in-depth series exploring wildfire risk management and financial forecasting strategies in some of the world’s most affected areas by Oliver Wyman Actuarial, which includes a global team of more than 300 credentialed actuaries. We begin with a study of North America, considering in particular the development of effective strategies in response to recent US legislation in this arena, and will follow with articles focusing on European and Australian contexts.
Legislative solutions to mitigate wildfire liabilities for utilities
Recently, many states have introduced and passed bills aimed at modifying the responsibilities and potential liabilities of public utilities concerning wildfire risk, damage, and loss — some increase the exposure, and some reduce it. This shift is likely a response to the increasing frequency of destructive fires, some of which are caused by power generation equipment, raising concerns about utility solvency.
In California, power utilities are held strictly liable for damage caused by their equipment, even if they are not negligent. As a result, these utilities face significant liabilities that can negatively impact their financial stability. To address this issue, California Assembly Bills 1054 and 111, passed in 2019, established programs, including the Wildfire Fund. The Fund allows utilities to recover wildfire damage liabilities if the fire was caused by their equipment and they acted prudently or took reasonable steps, acted in good faith, and followed proper risk mitigation and safety measures.
Other states outside of California are also working to tackle these challenges. There are new bills that require utilities to submit wildfire risk mitigation plans for approval, along with periodic updates. Utilities must adhere to these plans or face potential liability for damage if they are found responsible for causing wildfires. In some cases, when a utility is found liable for a wildfire but adhered to its approved mitigation plan, its liability may be capped or even eliminated entirely (as seen in Montana’s House Bill 490). Additionally, certain bills, like Wyoming’s House Bill 0192, impose time limits on lawsuits against utilities and cap damages per claim.
Exhibit 1 below outlines state house bills (HB), assembly bills (AB), and senate bills (SB) related to public utilities and wildfires, along with their current status, introduction dates, and the specific issues addressed in each bill. The issues are organized into the following four broad categories:
- Funding, which explains mechanisms for appropriating funds to cover wildfire claims, such as investor funded, payments from utility customers, or self-insurance.
- Liability, which details the liabilities that utilities face when a wildfire occurs, including information on claim submission timeframes, types of losses eligible for compensation, and other relevant conditions.
- Mitigation, which describes the wildfire risk mitigation plans that utilities are required to develop, submit, and implement.
- Preparedness, which focuses on risk mitigation strategies available to property owners and others to help reduce damage. It is distinct from the wildfire risk mitigation plans specifically for utilities.
The exhibit also highlights an emphasis on risk mitigation, as many bills require utilities to develop and implement wildfire risk mitigation plans. Many of these bills also aim to reduce the liability that utilities face, provided they adhere to their plans. However, only nine bills currently address the issue of funding loss payments.
It is not surprising that the states listed in Exhibit 1 are located in the West, as most of the country’s wildfire risk is concentrated in this region. Exhibit 2 presents a map of wildfire risk from the National Risk Index, created by the Federal Emergency Management Agency (FEMA). Higher wildfire risks are shown in the red areas, which represent the states included in Exhibit 1.
Estimating wildfire risk and potential liabilities
Wildfires have the potential to cause catastrophic damage. Electric utilities face potential liability if they are responsible for starting a fire, so utilities must respond with sound risk management strategies. Specifically, utilities can turn to actuarial methods and models developed in the insurance industry to estimate their wildfire risk and potential liabilities. These methods involve identifying and assessing exposure to risk, simulating potential damage and associated losses, and managing risk and capital accordingly.
1. Proactively forecast risk exposure to catastrophes
Estimating exposure involves identifying where and when wildfires are likely to occur based on a utility's operations and the sources of potential loss. Companies should have a comprehensive understanding of wildfires, including how they start and spread, the impact of weather, the areas of risk, and how climate change is altering risk patterns. This needs to be considered in combination with the utility’s own operations to truly understand exposure to wildfire risk. Actuaries can help quantify wildfire risk using mathematical models — such as catastrophe and risk models — that account for factors such as individual structure characteristics, topography, vegetation, precipitation, emergency access, and climate change.
2. Model wildfire-related damage, loss, and liability
Potential losses can be estimated using catastrophe models or other simulation techniques. This typically involves simulating thousands of wildfire events, where the modeled wildfires vary in intensity, size, speed, and location. By combining these simulations with exposure data, utilities can estimate potential damage and losses, factoring in insurance coverage and the impact of recently proposed or enacted laws. Using appropriate models is essential because the risk associated with wildfires has evolved due to climate change. The historical data on seasons, locations, and frequencies may not accurately represent future events.
After running simulations, distributions of damage and loss can be created to derive useful statistics, such as Value at Risk (VaR) and Conditional Value at Risk (CVaR). VaR provides insight into the maximum expected loss under normal conditions, while CVaR indicates the average loss in worst-case scenarios. This information is valuable for considering risk management options and determining customer charges in states where power companies can finance their funds through increased fees (see Exhibit 1 for states addressing funding).
3. Develop effective risk management options
Risk management strategies for wildfire liability typically fall into the following categories:
- Prevention and mitigation. Reducing the frequency of wildfires is a key component of the risk management framework. For wildfires, this can involve several strategies, such as clearing vegetation, structures, and debris near equipment to lower the risk of ignition; ensuring proper maintenance of equipment; and establishing a regular maintenance and monitoring schedule. As shown in Exhibit 1, many state bills require utilities to have an approved risk mitigation plan in place to qualify for liability protection.
- Insurance policies. Companies can purchase insurance policies or similar contracts to protect themselves from financial liabilities resulting from wildfire events.
- Self-insurance. This essentially involves creating a fund specifically designed to cover future wildfire liabilities.
- Other forms of risk transfer, such as catastrophe bonds and risk pooling groups. Catastrophe bonds (cat bonds) are a relatively new financial tool for managing wildfire risks. They allow issuers to access capital markets to spread their catastrophe risk exposure, rather than relying solely on traditional insurance policies. Risk pooling groups, although not explicitly mentioned in the bills (Exhibit 1), could be a viable option for utilities looking to collectively pool their wildfire risks with other utilities and share the costs of insurance. Estimating risk exposure and potential losses are necessary to effectively determine the costs associated with insurance, self-insurance, or other risk-transfer methods.
The impact of legislation on wildfire liabilities for utilities
The potential wildfire liabilities outlined in these bills are significant, making it essential for utilities that have not previously considered wildfires in their risk management strategies to do so now. Most of the liability protections proposed in the bills are contingent on the use of approved mitigation plans and acting prudently and reasonably to reduce risk.
However, despite these protections, the ongoing risk of extreme impacts and severe financial losses remains. Climate change is increasing both the frequency of wildfires and their geographical occurrence, which heightens the risk exposure and potential for large loss events.
To effectively manage these risks, there is a need for utilities and other organizations to build multidisciplinary teams, which should include experts in actuarial science, construction, civil engineering, finance, insurance, and science.
