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

Alternative Energy

A Shift in the Wind

As warranties run out on wind turbines, underwriters gain insight into their long-term costs.
By: | September 12, 2017 • 6 min read

Wind energy is all grown up. It is no longer an alternative, but in some wholesale markets has set the incremental cost of generation.

As the industry has grown, turbine towers have as well. And as the older ones roll out of their warranty periods, there are more claims.

This is a bit of a pinch in a soft market, but it gives underwriters new insight into performance over time — insight not available while manufacturers were repairing or replacing components.

Charles Long, area SVP, renewable energy, Arthur J. Gallagher

“There is a lot of capacity in the wind market,” said Charles Long, area senior vice president for renewable energy at broker Arthur J. Gallagher.

“The segment is still very soft. What we are not seeing is any major change in forms from the major underwriters. They still have 280-page forms. The specialty underwriters have a 48-page form. The larger carriers need to get away from a standard form with multiple endorsements and move to a form designed for wind, or solar, or storage. It is starting to become apparent to the clients that the firms have not kept up with construction or operations,” at renewable energy facilities, he said.

Third-party liability also remains competitive, Long noted.

“The traditional markets are doing liability very well. There are opportunities for us to market to multiple carriers. There is a lot of generation out there, but the bulk of the writing is by a handful of insurers.”

Broadly the market is “still softish,” said Jatin Sharma, head of business development for specialty underwriter G-Cube.

“There has been an increase in some distressed areas, but there has also been some regional firming. Our focus is very much on the technical underwriting. We are also emphasizing standardization, clean contracts. That extends to business interruption, marine transit, and other covers.”

The Blade Problem

“Gear-box maintenance has been a significant issue for a long time, and now with bigger and bigger blades, leading-edge erosion has become a big topic,” said Sharma. “Others include cracking and lightning and even catastrophic blade loss.”

Long, at Gallagher, noted that operationally, gear boxes have been getting significantly better. “Now it is blades that have become a concern,” he said. “Problems include cracking, fraying, splitting.

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“In response, operators are using more sophisticated inspection techniques, including flying drones. Those reduce the amount of climbing necessary, reducing risk to personnel as well.”

Underwriters certainly like that, and it is a huge cost saver to the owners, however, “we are not yet seeing that credited in the underwriting,” said Long.

He added that insurance is playing an important role in the development of renewable energy beyond the traditional property, casualty, and liability coverages.

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine. Weather risk coverage can be done in multiple ways, or there can be an actual put, up to a fixed portion of capacity, plus or minus 20 percent, like a collar; a straight over/under.”

As useful as those financial instruments are, the first priority is to get power into the grid. And for that, Long anticipates “aggressive forward moves around storage. Spikes into the system are not good. Grid storage is not just a way of providing power when the wind is not blowing; it also acts as a shock absorber for times when the wind blows too hard. There are ebbs and flows in wind and solar so we really need that surge capacity.”

Long noted that there are some companies that are storage only.

“That is really what the utilities are seeking. The storage company becomes, in effect, just another generator. It has its own [power purchase agreement] and its own interconnect.”

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine.”  —Charles Long, area senior vice president for renewable energy, Arthur J. Gallagher

Another trend is co-location, with wind and solar, as well as grid-storage or auxiliary generation, on the same site.

“Investors like it because it boosts internal rates of return on the equity side,” said Sharma. “But while it increases revenue, it also increases exposure. … You may have a $400 million wind farm, plus a $150 million solar array on the same substation.”

In the beginning, wind turbines did not generate much power, explained Rob Battenfield, senior vice president and head of downstream at JLT Specialty USA.

“As turbines developed, they got higher and higher, with bigger blades. They became more economically viable. There are still subsidies, and at present those subsidies drive the investment decisions.”

For example, some non-tax paying utilities are not eligible for the tax credits, so they don’t invest in new wind power. But once smaller companies or private investors have made use of the credits, the big utilities are likely to provide a ready secondary market for the builders to recoup their capital.

That structure also affects insurance. More PPAs mandate grid storage for intermittent generators such as wind and solar. State of the art for such storage is lithium-ion batteries, which have been prone to fires if damaged or if they malfunction.

“Grid storage is getting larger,” said Battenfield. “If you have variable generation you need to balance that. Most underwriters insure generation and storage together. Project leaders may need to have that because of non-recourse debt financing. On the other side, insurers may be syndicating the battery risk, but to the insured it is all together.”

“Grid storage is getting larger. If you have variable generation you need to balance that.” — Rob Battenfield, senior vice president, head of downstream, JLT Specialty USA

There has also been a mechanical and maintenance evolution along the way. “The early-generation short turbines were throwing gears all the time,” said Battenfield.

But now, he said, with fewer manufacturers in play, “the blades, gears, nacelles, and generators are much more mechanically sound and much more standardized. Carriers are more willing to write that risk.”

There is also more operational and maintenance data now as warranties roll off. Battenfield suggested that the door started to open on that data three or four years ago, but it won’t stay open forever.

“When the equipment was under warranty, it would just be repaired or replaced by the manufacturer,” he said.

“Now there’s more equipment out of warranty, there are more claims. However, if the big utilities start to aggregate wind farms, claims are likely to drop again. That is because the utilities have large retentions, often about $5 million. Claims and premiums are likely to go down for wind equipment.”

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Repair costs are also dropping, said Battenfield.

“An out-of-warranty blade set replacement can cost $300,000. But if it is repairable by a third party, it could cost as little as $30,000 to have a specialist in fiberglass do it in a few days.”

As that approach becomes more prevalent, business interruption (BI) coverage comes to the fore. Battenfield stressed that it is important for owners to understand their PPA obligations, as well as BI triggers and waiting periods.

“The BI challenge can be bigger than the property loss,” said Battenfield. “It is important that coverage dovetails into the operator’s contractual obligations.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]