In 2018, California suffered its most costly and deadly fire season to date. The year’s costliest insured loss event was California’s Camp Fire at USD 12 billion — also the most destructive fire in the state’s history. Additionally in 2018, over 100 people perished in wildfires in Greece; British Columbia, Canada, suffered its worst wildfire season in history; in Australia, bushfires burned on Sydney’s perimeters. Wildfires have become larger and more severe, according to Robert Reader, Managing Director, Guy Carpenter.
Urban populations are growing and expanding into the “Wildland Urban Interface (1)” (WUI), exacerbating wildfire risk and the potential cost of subsequent damage. “Wildfire-related losses have significantly increased in the past several decades as more and more properties have been built in such areas — the areas where human development encroaches on and interacts with natural woodlands or vegetation that is at high risk for wildfire,” Reader explains. Concurrently, changing weather patterns of precipitation and winds are clearly influencing wildfire activity.
Reader continues: “As industry stakeholders work to manage wildfire exposure, all types of carriers must refine customer selection using enhanced underwriting techniques or risk adverse selection to prevent a potentially catastrophic claims event. While personal lines may be the most affected line of business, commercial portfolios can also be exposed.”
In the past century, urban planning has focused on using fire preventative materials to provide additional structural resilience when a building is exposed to fire. However, in the case of a largescale wildfire, a number of small fires can spawn from the main fire, stressing fire department resources.
Wildfire risk differs from other natural perils in its extremity. Except for the most severe hurricane events, diversified insurers are generally able to absorb catastrophic losses within their cat program retentions without impairing their balance sheets. Wildfire episodes can be unpredictable and the resulting damage can vary in intensity – producing a damage ratio higher than that of other perils or completely destroying the majority of structures in an area.
“Insurers writing in areas with high wildfire risk could sustain abnormally high losses compared to their peers. Without knowledge of the risks, (re)insurers cannot develop a proper underwriting strategy that takes the specific risks into account,” Reader adds. “Relying on historical data only is not adequate for estimating wildfire risk because of the changing nature of the risk due to the development of the WUI. Insurers must evolve their risk assessment strategies using catastrophe models that account for a wide range of complex factors and do so on a regular basis as the territorial factors change over time.”
In addition to addressing portfolio risk, insurers confronting and actively managing wildfire risk demonstrate an understanding of their risks that will likely improve the efficiency of their reinsurance programs. Additionally, benefits may also emerge in dialogue with rating agencies and regulators.
“By examining total accumulations and market share, and seeing the risk from as many angles as possible (including the frequency, severity, location, and structures driving the risk), carriers can get a handle on their wildfire risk,” Reader says. “At Guy Carpenter, we analyze and develop data sets and tools to pull out insights that provide multiple views of the risk to help each client select risks at the point of sale and manage their aggregation. Running a simulated event set reveals how often locations might be affected by large fires.”
“Aggregating risk over the footprints of real wildfires provides a more realistic view of a carrier’s risk,” Reader adds. “We also take into account factors that may lessen or increase the risk in that area (for example, the type of vegetation cover). Combining the latest wildfire science with deep knowledge of underwriting strategy, we are able to equip carriers with the tools they need to understand how wildfire could affect their portfolios.”
There is no one answer to “solving” wildfire risk. Joint efforts of carriers, individuals, scientists, governments and society are required. While we work to understand the science of wildfire, carriers need to be aware of its potentially catastrophic impacts as well as the potential opportunities to those who are able and willing to underwrite it.
Guy Carpenter helps carriers develop and refine their wildfire appetite through comprehensive catastrophe modeling and aggregation management. The firm is guiding clients as the industry is reassessing its view of risk in the face of an accumulation of losses from recent extreme weather events and the specter of climate change.
1. The U.S. Forest Service defines the wildland-urban interface qualitatively as a place where “humans and their development meet or intermix with wildland fuel”.