The recommendation came in a report that addressed the ways the insurance sector could reduce climate risks in the Golden State.
The group said a pilot project for the community insurance solution should be created in an area of high wildfire risk.
It would cover a portion of the initial wildfire costs, including evacuation costs and up to $100,000 in homeowners’ coverage for participating residents.
The proposal came after California had a bumper year for wildfires in 2020, recording a total of 9,600 fires, with the area burned over four times larger than the 2015–2019 average, according to Munich Re.
However, insured losses were not as heavy as in 2017 and 2018 due to more rural areas being impacted.
The reinsurer also said individual fires last year alone accounted for the first, third, fourth, fifth, and sixth largest fires in the state since the 1930s.
The report further recommended that California should establish an extreme heat risk pool to cover reduced economic activity in heat waves.
It said the insurance commissioner should develop a policy to transfer aggregated risk from counties or cities to the state, and subsequently to reinsurance markets.
According to the group, such a pool would also account for risk of electricity outages and the need for interventions, such as cooling centres and proactive medical outreach which “can be abrupt and disruptive to budgets”.
Beyond the two fire insurance pools, the report also recommended the state develop improved hazard maps for wildfire and flood, provide funding for local government risk transfer, adopt land use restrictions and offer incentives for risk mitigation measures.
“The combination of solutions fundamentally benefits from promoting a feedback loop where clear understanding of risks promotes risk reduction actions and risk transfer decisions that ultimately lead to reducing future risks,” the report outlined.
The report comes just under two years after a devastating wildfire season led the state to set up a $21bn California wildfire fund to cover liabilities incurred by the state’s utility providers, with some reinsurance backing.
However after testing the market in June 2020, it decided to let a reinsurance cover lapse.