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

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now and where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]