Catastrophe Risk

Living With Wildfire Risk

As wildfire season stretches ever-longer, some experts say adaptation is as important as prevention.
By: | August 29, 2017 • 6 min read

In 2016, shocking images of a huge fire that destroyed 32,000 personal and commercial properties in the region of Fort McMurray, Canada, dominated the news for days. A year later, all eyes were on central Portugal when more than 60 people died in a blaze in the region of Pedrógão Grande.

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Last June, it was the turn of Portugal to suffer a catastrophic event, a more tragic one at that, as more than 60 people died in a blaze in the region of Pedrógão Grande, in the center of the country.

The threat of wildfires now commonly extends well beyond summer. The tourist town of Gatlinburg, Tenn., was devastated by wildfire in late November last year, resulting in 14 deaths and $600 million in insured losses. The total number of U.S. wildfires has actually fallen slightly in recent years, but high-intensity fires have increased, causing wider levels of destruction.

Experts say that the risk is becoming more intense due to climate change and the expansion of urban agglomerations towards forest areas. Exposed communities, the authorities, and the insurance industry alike need to tackle the challenges created by an ever more serious risk.

Patricia Alexandre, wildfire expert, University of Lisbon

The most visible and tragic effect of wildfires is the potential to cause a large number of deaths. The Pedrógão Grande tragedy was the third deadliest wildfire recorded this century, surpassed only by the Black Saturday bushfires in Australia, which killed 180 people in 2009, and the fires that rampaged through Greece in August 2007, which left 65 fatalities.

Since 2000, more than 1,000 people have died as a direct consequence of wildfires around the world, according to the Emergency Events Database, which is maintained by the Catholic University of Louvain, in Belgium.

But economic losses can also be significant, and their impact on the insurance industry is steadily on the rise, as some of the regions most exposed to wildfire risks have high levels of insurance penetration.

This is the case in the Western U.S., Australia and Canada, as well as parts of the Mediterranean basin in Europe. The Fort McMurray blaze caused Canada’s largest-ever insured losses, reaching $2.9 billion, according to Swiss Re. Total economic losses were close to $4 billion, the highest ever for a natural catastrophe event in the country.

Between 2000 and 2016, insured losses caused by wildfire surpassed more than $40 billion. That sounds small compared to damages caused by events such as earthquakes and floods. But there are indications that both economic and insured losses could pile up in the future.

Key Contributors

Climate change and lifestyle shifts are driving up the risk of wildfire in places such as the Western U.S. Drier summers and warmer winters have extended the wildfire season, increasing the risk of combustion. At the same time, the desire of wealthy homeowners to live closer to natural surroundings has increased the exposure of properties to the risk.

“Wildfire risks are becoming more serious as events take place near the ever-expanding wildland-urban interface areas,” said Kevin Van Leer, a product manager at risk modeling firm RMS. “The wildfire season also appears to start earlier and end later than it used to.”

“All agents involved need to realize that in some areas, fires are part of the ecosystem and they will happen.” — Patricia Alexandre, wildfire expert, University of Lisbon

Cal Fire, California’s firefighting agency, reported 488 wildfires in the state during the first week of July alone. An official told the Washington Post that, usually, there were between 150 and 200 events in the peak wildfire season.

“We expect more hot and dry weather in the future, and thus, more fire,” said Mike Flannigan, a wildfire researcher and professor at the University of Alberta. “It is only getting worse.”

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In Alberta, the beginning of the fire season used to be set at April 1st, peaking in June or July. Nowadays, preparations begin at earnest in March 1st, and May is proving to be the most dangerous period of the year.

The evolution of wildfire risks creates challenges for the insurance industry, especially as events occur more often in areas with significant insurance penetration.

“There are large, dense populations in California in areas where there is a high risk of wildfire around them,” said Tom Jeffery, a senior hazard scientist at Corelogic, a risk consultancy.

Verisk, another risk consultancy, has estimated that 30 percent of households in Oklahoma and Wyoming, and 50 percent in Montana, are exposed to moderate to high risk of wildfire losses.

Companies such as RMS, which expects to release a wildfire risk model soon, claim they are making progress in the ability to model the risk.

“From a modeling point of view, probabilistic methods can enable insurers and reinsurers to better manage their accumulations of exposure, particularly in the wildland-urban interface,” Van Leer said.

Kevin Van Leer, product manager, RMS

But several challenges remain on the proper aggregation of exposures. The unpredictability of weather trends makes it hard to forecast when and where a wildfire might occur, and how far it can spread out, as the amount of snow that falls in winter and the intensity of rainfalls in the summer are important factors to be considered.

The universe of claims data is still limited, and it is also complicated to forecast the possible causes of a wildfire event. Wildfires can originate from human or natural causes alike. The Fort McMurray disaster was likely to have been caused by people, while this year’s tragedy in Portugal has been attributed to lightning.

In certain ecosystems, such as boreal forests, fires are part of a delicate balance that has been forged during several millennia, and some kinds of fauna and flora specimens rely on regular bouts of burning to maintain their life cycles.

For that reason, in many situations, the best course of action when there is a fire is to keep an eye on it, but let it run its course. And a good thing it is too, as the sheer volume of wildfires that are registered every year would make it practically impossible to fight them all.

According to the National Interagency Fire Center, there have been more than 33,920 wildfires in the United States alone year to date through July 14. But only a handful of them, however, are considered a cause for concern by authorities.

“In the Western U.S., 1 percent of the fires answer for 99 percent of the burned area. In Canada, it is estimated that 3 percent of fires burn 97 percent of the burned area,” Flannigan said.

“Out of thousands of wildfires reported every year, only a couple of them cause significant insurance damage,” Van Leer pointed out. “But, as in the case of Fort McMurray and Gatlinburg last year, they can be very important events.”

Mitigate and Adapt

Once a wildfire gains in size and intensity, putting it out is virtually impossible by human means. The best firefighters can do is to direct the bulk of the fire away from populated areas, and even that can be daunting.

Tom Jeffery, senior hazard scientist, Corelogic

That’s why insurers, as well as local authorities, are emphasizing mitigation measures.

In Flannigan’s view, the best way to deal with the risk of wildfire is the same way that many communities already tackle floods — in other words, by adapting to it. Properties must be built with non-flammable materials, and inhabitants should make sure that their properties are kept clear of dry shrubs, leaves and twigs, among other potential fuels.

Many other small measures like these have been encouraged by local authorities in a quest to reduce the opportunities for fire to spread, although officials say that they often meet resistance from property owners.

Research with American communities exposed to wildfire has found out that only a tiny minority of homeowners would be willing to invest in such measures, although a much larger number would be more amenable to the idea if they could share the costs with the state.

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The resistance to adaptation is particularly worrying because even if a property owner takes all the right measures but her neighbors don’t, the house is likely to burn down anyway. “It’s like dominos,” Flannigan said.

Keeping a community tidy may also prove insufficient, as studies have concluded that one the main reasons why the Fort McMurray fire caused so much property damage was the spreading of burning embers carried by the wind and dropped onto the roofs of buildings. So fireproof roofing and cladding is part of the equation.

“All agents involved need to realize that in some areas, fires are part of the ecosystem and they will happen,” said Patricia Alexandre, a wildfire expert at the University of Lisbon. who has studied the phenomenon both in Portugal and the United States.

“It goes for communities, governmental agencies, insurance companies and so on. It is just like floods. It makes sense to treat it as a reality and adapt and be ready for it.” &

Rodrigo Amaral is a freelance writer specializing in Latin American and European risk management and insurance markets. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Lead Story

Improving the Claims Experience

Insureds and carriers agree that more communication can address common claims complaints.
By: | January 10, 2018 • 7 min read

Carriers today often argue that buying their insurance product is about much more than financial indemnity and peace of mind.

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Many insurers include a variety of risk management services and resources in their packages to position themselves as true risk partners who help clients build resiliency and prevent losses in the first place.

That’s all well and good. No company wants to experience a loss, after all. But even with the added value of all those services, the core purpose of insurance is to reimburse loss, and policyholders pay premiums because they expect delivery on that promise.

At the end of the day, nothing else matters if your insurer can’t or won’t pay your claim, and the quality of the claims experience is ultimately the barometer by which insureds will judge their insurer.

Why, then, is the process not smoother? Insureds want more transparency and faster claims payment, but claims examiners are often overburdened and disconnected from the original policy. Where does the disconnect come from, and how can it be bridged?

Both sides of the insurer-insured equation may be responsible.

Susan Hiteshew, senior manager of global insurance and risk management, Under Armor Inc.

“One of the difficult things in our industry is that oftentimes insureds don’t call their insurer until they have a claim,” said Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“It’s important to leverage all of the other value that insurers offer through mid-term touchpoints and open communication. This can help build the insurer-insured partnership so that when a claim materializes, the relationships are already established and the claim can be resolved quickly and fairly.”

“My experience has been that claims executives are often in the background until there is an issue that needs addressing with the policyholder,” said Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America.

“This is unfortunate because the claims department essentially writes the checks and they should certainly be involved in the day to day operations of the policyholders in designing polices that mitigate claims.

“By being in the shadows they often miss the opportunity to strengthen the relationship with policyholders.”

Communication Breakdown

Communication barriers may stem from internal separation between claims and underwriting teams. Prior to signing a contract and throughout a policy cycle, underwriters are often in contact with insureds to keep tabs on any changes in their risk profile and to help connect clients with risk engineering resources. Claims professionals are often left out of the loop, as if they have no proactive role to play in the insured-insurer relationship.

“Claims operates on their side of the house, ready to jump in, assist and manage when the loss occurs, and underwriting operates in their silo assessing the risk story,” Hiteshew said.
“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.”

Both insureds and claims professionals agree that most disputes could be solved faster or avoided completely if claims decision-makers interacted with policyholders early and often — not just when a loss occurs.

“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.” – Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“Communication is critically important and in my opinion, should take place prior to binding business and well before a claim comes in the door,” said David Crowe, senior vice president, claims, Berkshire Hathaway Specialty Insurance.

“In my experience, the vast majority of disputes boil down to lack of communication and most disputes ultimately are resolved when the claim decision-maker gets involved directly.”

Talent and Resource Shortage

Another contributing factor to fractured communication could be claims adjuster workload and turnover. Claims adjusting is stressful work to begin with.

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Adjusters normally deal with a high volume of cases, and each case can be emotionally draining. The customer on the other side is, after all, dealing with a loss and struggling to return to business as usual. At some TPAs, adjuster turnover can exceed 25 percent.

“This is a difficult time for claims organizations to find talent who want to be in this business long-term, and claims organizations need to invest in their employees if they’re going to have any success in retaining them,” said Patrick Walsh, executive vice president of York Risk Services Group.

The claims field — like the insurance industry as a whole — is also strained by a talent crunch. There may not be enough qualified candidates to take the place of examiners looking to retire in the next ten years.

“One of the biggest challenges facing the claims industry is a growing shortage of talent,” said Scott Rogers, president, National Accounts, Sedgwick. “This shortage is due to a combination of the number of claims professionals expected to retire in the coming years and an underdeveloped pipeline of talent in our marketplace.

“The lack of investment in ensuring a positive work environment, training, and technology for claims professionals is finally catching up to the industry.”

The pool of adjusters gets stretched even thinner in the aftermath of catastrophes — especially when a string of catastrophes occurs, as they did in the U.S in the third quarter of 2017.

“From an industry perspective, Harvey, Irma and Maria reminded us of the limitations on resources available when multiple catastrophes occur in close succession,” said Crowe.

“From independent and/or CAT adjusters to building consultants, restoration companies and contractors, resources became thin once Irma made landfall.”

Is Tech the Solution?

This is where Insurtech may help things. Automation of some processes could free up time for claims professionals, resulting in faster deployment of adjusters where they’re needed most and, ultimately, speedier claims payment.

“There is some really exciting work being done with artificial intelligence and blockchain technologies that could yield a meaningful ROI to both insureds and insurers,” Hiteshew said.

“The claim set-up process and coverage validation on some claims could be automated, which could allow adjusters to focus their work on more complex losses, expedite claim resolution and payment as well.”

Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Predictive modeling and analytics can also help claims examiners prioritize tasks and maximize productivity by flagging high-risk claims.

“We use our data to identify claims with the possibility of exceeding a specified high dollar amount in total incurred costs,” Rogers said. “If the model predicts that a claim will become a large loss, the claim is redirected to our complex claims unit. This allows us to focus appropriate resources that impact key areas like return to work.”

“York has implemented a number of models that are focused on helping the claims professional take action when it’s really required and that will have a positive impact on the claim experience,” Walsh said.

“We’ve implemented centers of excellence where our experts provide additional support and direction so claim professionals aren’t getting deluged with a bunch of predictive model alerts that they don’t understand.”

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners.” — Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Many technology platforms focused on claims management include client portals meant to improve the customer experience by facilitating claim submission and communication with examiners.

“With convenient, easy-to-use applications, claimants can send important documents and photos to their claims professionals, thereby accelerating the claims process. They can designate their communication preferences, whether it’s email, text message, etc.,” Sedgwick’s Rogers said. “Additionally, rules can be established that direct workflow and send real time notifications when triggered by specific claim events.”

However, many in the industry don’t expect technology to revolutionize claims management any time soon, and are quick to point out its downsides. Those include even less personal interaction and deteriorating customer service.

While they acknowledge that Insurtech has the potential to simplify and speed up the claims workflow, they emphasize that insurance is a “people business” and the key to improving the claims process lies in better, more proactive communication and strengthening of the insurer-insured relationship.

Additionally, automation is often a double-edged sword in terms of making work easier for the claims examiner.

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners,” Holden said.

“So while the intent is to make things more streamlined for claims staff, the byproduct is that management assumes that examiners can now handle more files. If management carries that assumption too far, you risk diminishing returns and examiner burnout.”

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By further taking real people out of the equation and reducing personal interaction, Holden says technology also contributes to deteriorating customer service.

“When I started more than 30 years ago as a claims examiner, I asked a few of the seasoned examiners what they felt had changed since they began their own careers 30 year earlier. Their answer was unanimous: a decline in customer service,” Holden said.

“It fell to the wayside to be replaced by faster, more impersonal methodologies.”

Insurtech may improve customer satisfaction for simpler claims, allowing policyholders to upload images with the click of a button, automating claim valuation and fast-tracking payment. But for complex claims, where the value of an insurance policy really comes into play, tech may do more harm than good.

“Technology is an important tool and allows for more timely payment and processing of claims, but it is not THE answer,” BHSI’s Crowe said. “Behind all of the technology is people.” &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]