A surge in the frequency and magnitude of wildfires in the US is encouraging the insurance industry to develop innovative ways of underwriting and managing risk.
California is bearing the brunt of the global rise in wildfires, with this summer marking one of the State’s most destructive fire seasons on record.
So far this year, a total of 5,581 fires have burned an area covering more than a million acres, according to figures from the National Geographic Area Coordination Center retrieved on August 221.
A mix of meteorological and demographic trends is causing the widespread devastation. The western US, and in particular California, is suffering a drought of the intensity and duration only seen once every 500 years, according to Josh Darr, Senior Vice President and Lead Meteorologist at JLT Re.
“In California last year the meteorological conditions were so severe that we saw wildfires spread into areas we didn’t think were even prone to wildfire damage five or ten years ago,” he says.
“We usually think about a home or business that sits on the edge of a forest as the most risky, but the fires of last year taught us that when the meteorological conditions are correct – namely, severe drought, high winds and extreme temperatures – this can cause fires that are larger and more damaging than we previously thought.”
The snowpack across the western US has also been melting more quickly than it used to. This means water comes down rivers earlier in the year, causing elevated areas to dry out more quickly.
Living in the wildland-urban interface
The western US has seen a large increase in residential and commercial development in areas prone to wildfires.
Approximately one-third of the US population, or 44 million homes, are now based in the ‘wildland-urban interface’ (WUI), a zone where homes are built near or among lands prone to wildland fire2.
Kimberly Roberts, Vice President and Meteorologist at JLT Re, explains: “In mountainous areas, high-value homes are being built in the WUI because these zones are still accessible to the city but are considered more desirable because of their beauty.
“In Santa Rosa, the Hanley Fire in 1964 followed an almost identical path to the Tubbs Fire in 2017, but there was very little destruction because no one was living in the hills to the northeast of the city.
“Now, thousands of homes are built close together with one main access road out of the area. Combined with high-risk weather conditions, you have the perfect recipe for a large-scale fire of the type we saw in 2017.”
With devastating wildfires now considered the ‘new normal,’ there is a pressing need for insurers to adjust their risk-scoring models and improve loss-reduction strategies.
“Last year there were several insurers struggling to get their heads around wildfire risk and threatening to take underwriting action to limit their exposure.
“Fast forward to this summer and you have the Insurance Commissioner of California questioning whether there are certain parts of the State that will eventually become uninsurable,” says Darr.
“We don’t think that’s the case. We think the combination of more advanced modeling, tools that enable a thorough assessment of an area’s risk profile and risk mitigation techniques will mean insurance will still be offered, but it will certainly be more expensive.”
Currently, wildfire risk is not well modeled but this is expected to change over the next couple of years once new models, expected to be launched in the fall of 2018, are validated.
In the meantime, JLT Re has been encouraging its clients to think about their level of accumulation in high-risk areas, how much they are willing to lose, and whether they would suffer greater losses than their peers.
JLT Re has developed a hazard score that combines information on the types and amount of fuel in the local area, the terrain features that can influence fire spread, as well as precipitation statistics and proximity to the WUI.
The JLT Re Wildfire Risk Score takes into account not only the local terrain and fuel characteristics, but also considers adjacent regions which could provide fuel in the form of wind-born embers.
“This score can be used to inform underwriting practices and help insurers to price risk. We also run the score through our accumulation model so we can inform our clients about how much value they have in certain wildfire-prone areas,” says Roberts.
The next 12 months could see the development of alternative insurance solutions such as cat bonds, perhaps mirroring those created in the aftermath of the 2004 hurricanes.
It is hoped that these, combined with new modeling tools and risk scoring solutions, will help the insurance market approach wildfire risks with greater confidence.
How wildfires are becoming more severe
Record heatwaves in the northern hemisphere have seen deadly wildfires sweep across the western US, Europe and Siberia. California has been the worst hit, with 14 of the 20 largest wildfires on record occurring in the past 15 years3.
For homeowners and farm owners in California, direct losses from wildfires nearly quadrupled to US$16 billion in 2017 from US$4.2 billion the year before, according to A.M. Best. NOAA estimated that the economic impact of all western US wildfires in 2017 tallied US$18.4 billion4.
The US Department of Interior says around 90 percent of wildland fires in the US are caused by people.
This includes unattended campfires, negligently discarded cigarettes and intentional acts of arson. The remaining 10 percent are started by lightning or lava5.
In Europe, meanwhile, the number of wildfires this year is 43 percent higher than the ten-year average. Around 85 percent of the total burnt area in Europe occurs in the Mediterranean6.
1 https://gacc.nifc.gov/sacc/predictive/intelligence/NationalYTDbyStateandAgency.pdf 2 http://www.air-worldwide.com/Press-Releases/AIR-Worldwide-Expands-Commitment-to-Wildfire-Risk-Management-with-Wildfire-Model-for-the-United-States/ 3 https://en.wikipedia.org/wiki/List_of_California_wildfires 4 https://www.ncdc.noaa.gov/billions/events.pdf 5 https://www.iii.org/fact-statistic/facts-statistics-wildfires 6 https://www.telegraph.co.uk/news/2018/07/25/wildfires-third-europe-heatwave-hit-north-seeing-huge-increases/
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