Understanding, assessing and managing wildfire risk
Wildfire risk has become a topic of increasing concern in the insurance market, due to the increasing rate and severity of fires.
This is compounded by the difficulties underwriters face in the identification and quantification of wildfire loss potential.
A general drive towards increased model completeness over recent years – as part of necessary and best practice exposure management processes – has seen the rise of wildfire risk modeling techniques but, as with any model – and, in particular, those in their infancy – the uncertainty around the true quantification of wildfire risk remains a challenge.
It has been four years since the Camp Fire's unprecedented deadly and destructive nature was witnessed across California, leading to the single biggest insurance loss event of 2018, according to Swiss Re.1
$12 bn insured losses as a result of Calfornia Camp Fire, with 85 people killed and 19,000 structures burned
As discussed by a report in The Nature Conservancy (TNC) and WTW, the destructive nature of the wildfire was immense: “the Camp Fire burned nearly 19,000 structures, killed at least 85 people, and resulted in insured losses of $12 billion”.2
Since then, the severity of the fires has increased, especially across California.
As shown in in the graph below from Munich Re, a large number of the wildfires that have occurred since 2001 had high maximum temperatures particularly when warm and dry conditions were prevalent.3
Data source: NCEI/NOAA, California Department of Forestry and Fire Protection
With the ever-increasing implications of climate change and urban development in fire prone areas, firms must ensure that techniques are developed to handle this increasing risk.
This has led to conversations relating to the development of more sophisticated ways to model and quantify climate change risk, including for wildfire.
The PG&E landmark ruling where the Dixie Fire was deemed to be sparked “by a tree that fell on electrical distribution lines owned and operated by PG&E”4 illustrates the extent of liability exposure that wildfire risk could include.
Indeed, many contractors and utilities subsequently found themselves faced with extremely limited avenues for any degree of balance sheet protection.
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1 https://www.swissre.com/risk-knowledge/mitigating-climate-risk/natural-catastrophes-affecting-more-people-what-can-do-to-help.html
2 www.nature.org/content/dam/tnc/nature/en/documents/FINALwildfire
resilienceinsurancesummaryofinsights6.27.21PAGES.pdf
3 www.munichre.com/topics-online/en/climate-change-and-natural-disasters/climate-change/climate-change-has-increased-wildfire-risk.html
4 www.cnbc.com/2022/01/05/california-finds-pge-equipment-responsible-for-massive-dixie-fire-.html
