The modern property & casualty insurance industry was born in fire.

Wildfires are generally a natural phenomenon, but climate change and deforestation, which results in longer wildfire seasons, heat waves, droughts, and dry conditions, creates ideal conditions for catastrophic wildfires. The number of communities built in natural wildfire areas worsens the problem. It is the equivalent of building in a flood zone. Human activity causes ninety-five percent of wildfires. The UN reports that the risk of devastating fires could increase by fifty-seven percent by 2100. Solving the increasing economic costs of climate change-driven wildfires is a challenge for insurers. Still, it bears remembering that the modern American insurance industry began by addressing the challenge of urban fires.

The conflagrations that burned 18th and 19th Century American cities to the ground were the crucible from which the property and casualty industry was forged and tempered. The insurance industry emerged like the phoenix from the ashes of cities like Boston, New York, Charleston, Savannah, New Orleans, and Portland as a free market leader that re-imagined the city as the engine of prosperity, making progress of the 20th Century possible. In partnership with the government, the insurance industry helped make it possible for people, businesses, and communities to rebuild after a disaster. The insurance industry’s leadership made progress possible.

In response to the significant conflagrations and fires in the late 19th Century, notably the Preshtigo Fire (the worst wildfire in American history), and the Great Chicago Fire of 1871, and the later San Francisco earthquake and fire of 1906, the insurance industry created several revolutionary organizations to address the challenges of urban conflagrations. Some of the notable organizations include:

1. The National Board of Fire Underwriters (NBFU)
   Founded in 1866, this organization aimed to promote fire prevention and standardize fire insurance policies. The NBFU developed building codes and recommendations to reduce fire risk in cities.
2. The National Fire Protection Association (NFPA)
   Established in 1896, the NFPA focused on developing fire safety codes, standards, and practices. Its mission was to minimize fire hazards through education, research, and advocacy.
3. The American Association of Insurance Services (AAIS)
   Founded in 1936, the AAIS focused on creating standardized insurance policy forms, rates, and rules. These standards helped improve consistency and transparency in the insurance industry.
4. The Underwriters’ Laboratories (UL)
   Though founded in 1894, UL gained prominence in the 20th Century. It conducted safety testing and certification for products, contributing to fire prevention efforts and the safety of consumer goods.

These organizations played significant roles in shaping fire prevention practices, improving building standards, and establishing uniform insurance policies to mitigate the risks associated with conflagrations and fires.

The local insurance agent and the risk manager are another significant group and undervalued agents in practical risk management. I started my career as an insurance agent in Hartford, Connecticut. My first boss was a man named Shep Merrill. Mr. Merrill (even fifty years later, he is still Mr. Merrill) was a Marine that fought in the Pacific theatre during World War II. He sported a “clean and tight” haircut and never went to college, but he was one of the best insurance people I have ever met. Mr. Merrill wrote Aetna C&S’s property and casualty training manuals. Mr. Merrill had an extensive portfolio of personal and commercial lines businesses specializing in marinas and boats.

Mr. Merrill believed in insurance as a noble calling that protected lives, property, and the future. He believed in risk management and mitigation as a necessary part of the insurance process. Mr. Merrill had an engineer on the payroll who “surveyed” each account. These surveys were expensive, but the insured reduced their risk, and the surveys often justified a better rate. The insurer benefited by having the opportunity to underwrite better accounts, and (I think) Mr. Merrill protected his contingent commission.

Mr. Merrill believed that correctly done surveys complemented a rating structure that accurately reflected the hazards and perils of the risk and was central to a robust safety culture and sound risk management. While doing a marina safety survey, he explained one day that subsidized insurance encourages lousy risk management practices.

I don’t know what Mr. Merrill would have thought about climate change. Still, he would not have missed the warming seas, sea level rise, flooding, the increasing intensity of hurricanes, convective storms, drought, and the growing devastation caused by wildfires. Mr. Merrill had an extensive portfolio of homes and businesses on the Connecticut shore, so he worried about hurricanes, flooding, and fire. As a Hartford insurance man, Mr. Merrill respected fire as a devastating peril. He would have been horrified by the scale, devastation, and ferocity of the wildfires in Canada, California, and Maui.

When I joined Mr. Merrill, one of my first assignments was to read old Hartford Courant clippings describing the Hartford Ringling Brothers and Barnum Bailey 1944 circus fire that killed 167 people (including 80 children) and injured 700 people. Mr. Merrill wanted me to understand that this disaster was a risk management and regulatory failure. Using the newspaper clippings as teaching aids, he walked me through the various failure points that contributed to the tragedy. Mr. Merrill also explained how the insurance industry responded, working with the American Standards Association to develop regulations to prevent such disasters in the future.

Mr. Merrill also discussed the “Great Fire of December 1835,” which destroyed much of lower Manhattan but resulted in the eventual emergence of modern New York. Many insurance companies were insolvent as a result of this conflagration. Eliphalet Terry, the Hartford Fire Insurance Company president, pledged his own property, put all of its New York policies in a sleigh, and drove to Wall Street to honor its claims and help New Yorkers rebuild. Mr. Merrill felt that was the service standard to which insurance companies should aspire.

There is a somewhat cynical saying that “no good deed goes unpunished.” This saying is exceptionally true when protecting and insuring assets in areas where climate change as a hazard accelerates the frequency and severity of insured perils such as floods and wildfires.

For example, the state and federal governments have fire suppression programs to protect property. On its surface a great idea. However, these fire suppression programs put out fires that otherwise would have consumed materials that would have decreased the fuel loads that support catastrophic wildfires. It is a vicious cycle. The government fire suppression programs enable people to build in high-risk wildfire areas.

Another example of a “no good deed goes unpunished” is the existence of good fire insurance means that most of us no longer focus our best efforts on preventing fires. The lack of participation by homeowners in fire suppression, in essence, expects insurers to subsidize homeowners living in high-risk areas. Some states compound the problem by not allowing insurers to use predictive modeling when determining their catastrophe loadings in their rates. The past is only a partially effective data set for forecasting the impact of climate change on insured perils and their rates.

I am guessing that Mr. Merrill, drawing on lessons from the insurance industry’s work on taming urban fires or conflagrations, might suggest that the insurance industry continue to support the ongoing state and federal efforts to deal with the climate change-driven peril of wildfire. He would also argue that a free-market solution is the best option.

Proponents of a free-market approach argue that allowing market dynamics to play a role will yield constructive outcomes. First, insurers can recalibrate their premium structures to align with the risks associated with climate change and wildfires. This adjustment could lead to more equitable premiums for properties situated within high-risk areas and eliminate unintended subsidies. At the same time, the competitive landscape among entrepreneurs, insurers, brokers, and insurance agents will stimulate innovative risk management solutions. Ideally, a free-market approach will encourage the adoption of premium incentives by insurers for homeowners who proactively undertake wildfire mitigation measures, thereby fostering a culture of responsible risk management. As importantly, communities could emerge as agents of change, embarking on infrastructure enhancements to bolster their resilience against wildfires.

The free-market approach brings undeniable advantages. However, addressing the urban conflagration challenge requires a broad-based strategic partnership; a comprehensive approach to address the catastrophic challenge of wildfire will require an even more inclusive strategic collaboration among insurers, reinsurers, developers, government agencies, regulatory bodies, and pertinent organizations to protect the environment, people and property and at the same time ensure the stability of the insurance market.

Mr. Merrill was a combat veteran with a practical view of the world. He would not have underestimated the difficulties of developing an inclusive strategic view to addressing the catastrophe challenge of wildfires or any other climate change-supercharged peril. The insurance industry’s success in addressing urban fire in the late 19th Century resulted from hard work and intense lobbying in a contentious political time. The Civil War ended in 1865. The Reconstruction Act divided the South into five military districts governed by a Union General. The Ku Klux Klan was on the rise. The population was exploding due to the influx of immigrants. People were moving to the cities. Machine politics, as exemplified by Tammany Hall and the Pendergast Machine, dominated life and politics in major cities. Graft and corruption were commonplace. Rapid industrialization created a new class of uber-wealthy industrialists. Wildcat insurers ripped off policyholders. Insurance regulations were spotty and ineffective. Conflagrations were killing people, burning cities, reducing natural resources to ash, and pushing insurers into insolvency. Eventually, the political pain became enough to create the environment for change.

In this hostile environment, the Aetna Insurance Company (1819), the Hartford Fire Insurance Company (1810), and the Travelers Insurance Company (1853) were among the insurance industry leaders who worked with architects, builders, engineers, and scientists and lobbied cities and state governments to manifest the political will and commercial resolve to create the building codes, and safety standards that made the modern city possible. The insurance industry championed numerous studies and improvements such as fireproofing standards, the scientific study of materials, building material classification, elevator safety, water supply and fire hydrants, spacing between buildings, regular inspections, safety exits, the safety of electrical installations, rating systems for cities, regulations for storing hazardous materials, and safety education.

Mr. Merrill would have recognized that in the 21st Century, climate change supercharges perils such as wildfire (not to mention hurricanes, flooding, sea level rise, storm surge, heat waves, drought, and convective storms) are as big as threats as conflagration was in the 19th Century. He also would have had confidence that, with time and enough broad-based political pain, the insurance industry would help create the business, regulatory, and community coalitions and political will to address the challenges of climate-change supercharged perils.

Shep Merrill’s lessons about the importance of insurance, risk management, and leadership are timeless. It’s time that the Insurance industry, citizen groups, and politicians come back to the table to improve the protection of our people and infrastructure.