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

2018 Most Dangerous Emerging Risks

Emerging Multipliers

It’s not that these risks are new; it’s that they’re coming at you at a volume and rate you never imagined before.
By: | April 9, 2018 • 3 min read

Underwriters have plenty to worry about, but there is one word that perhaps rattles them more than any other word. That word is aggregation.

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Aggregation, in the transferred or covered risk usage, represents the multiplying potential of a risk. For examples, we can look back to the asbestos claims that did so much damage to Lloyds’ of London names and syndicates in the mid-1990s.

More recently, underwriters expressed fears about the aggregation of risk from lawsuits by football players at various levels of the sport. Players, from Pee Wee on up to the NFL, claim to have suffered irreversible brain damage from hits to the head.

That risk scenario has yet to fully play out — it will be decades in doing so — but it is already producing claims in the billions.

This year’s edition of our national-award winning coverage of the Most Dangerous Emerging Risks focuses on risks that have always existed. The emergent — and more dangerous — piece to the puzzle is that these risks are now super-charged with risk multipliers.

Take reputational risk, for example. Businesses and individuals that were sharply managed have always protected their reputations fiercely. In days past, a lapse in ethics or morals could be extremely damaging to one’s reputation, but it might take days, weeks, even years of work by newspaper reporters, idle gossips or political enemies to dig it out and make it public.

Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

These days, the speed at which Internet connectedness and social media can spread information makes reputational risk an existential threat. Information that can stop a glittering career dead in its tracks can be shared by millions with a casual, thoughtless tap or swipe on their smartphones.

Aggregation of uninsured risk is another area of focus of our Most Dangerous Emerging Risks (MDER) coverage.

The beauty of the insurance model is that the business expands to cover personal and commercial risks as the world expands. The more cars on the planet, the more car insurance to sell.

The more people, the more life insurance. Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

As Risk & Insurance® associate editor Michelle Kerr and her sources point out, growing populations and rising property values, combined with an increase in high-severity catastrophes, threaten to push the insurance coverage gap to critical levels.

This aggregation of uninsured value got a recent proof in CAT-filled 2017. The global tally for natural disaster losses in 2017 was $330 billion; 60 percent of it was uninsured.

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This uninsured gap threatens to place unsustainable pressure on public resources and hamstring society’s ability to respond to natural disasters, which show no sign of slowing down or tempering.

A related threat, the combination of a failing infrastructure and increasing storm severity, marks our third MDER. This MDER looks at the largely uninsurable risk of business interruption that results not from damage to your property or your suppliers’ property, but to publicly maintained infrastructure that provides ingress and egress to your property. It’s a danger coming into shape more and more frequently.

As always, our goal in writing about these threats is not to engage in fear mongering. It’s to initiate and expand a dialogue that can hopefully result in better planning and mitigation, saving the lives and limbs of businesses here and around the world.

2018 Most Dangerous Emerging Risks

Critical Coverage Gap

Growing populations and rising property values, combined with an increase in high-severity catastrophes, are pushing the insurance protection gap to a critical level.

Climate Change as a Business Interruption Multiplier

Crumbling roads and bridges isolate companies and trigger business interruption losses.

 

Reputation’s Existential Threat

Social media — the very tool used to connect people in an instant — can threaten a business’s reputation just as quickly.

 

AI as a Risk Multiplier

AI has potential, but it comes with risks. Mitigating these risks helps insurers and insureds alike, enabling advances in almost every field.

 

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]