Wildfires cause catastrophic damage and pose a recurring threat in many parts of the world. Recent months have seen towns across Canada evacuated as fires have continued to affect various regions[1] .
In Europe, the emergency services are preparing for another busy summer after fires cause devastation in Portugal, Spain, Italy and Greece in 2023[2]. In Asia, this year has already seen serious wildfires in countries including Bangladesh and Nepal[3] .
131 lives were claimed by wildfires in Chile in February 2024.
In the Americas, wildfires in Chile claimed 131 lives in February 2024; in the US, the Smokehouse Creek wildfire in Texas was the state’s largest ever fire.
The threat of wildfires continues to grow due to both climate change and increased urbanization. As the world warms, rising global temperatures are contributing to more severe fire weather conditions.
And the expansion of structures into the “wildland-urban interface” increases exposure and vulnerability. This makes prioritizing wildfire prevention and response crucial for both individuals and businesses.
Understanding the evolving nature of wildfires is vital. The science on how climate change is driving changes in the behavior and characteristics of wildfires is still developing.
To better understand this, the WTW Research Network is collaborating with leading research institutions to uncover the science behind these wildfires, including changes in historical and future frequency and severity.
Understanding these shifts is essential for organizations worldwide to develop effective strategies to mitigate the risks associated with wildfires.
Wildfires (and bushfires) are often large and uncontrolled and start in areas such as forest or grasslands. They may be ignited by natural phenomena such as lightning, but human activity is often the primary cause, accounting for as many as 80% of wildfires according to some studies[4]
Wildfires require an ignition source, as well as heat, oxygen and fuel. Often, strong winds carry embers beyond the immediate boundaries of fire, spreading the fire to other areas and properties.
Climate change is contributing to an increased risk of wildfires in some regions, but local weather conditions also play a crucial role. For instance, an unusually dry winter can heighten the likelihood of wildfires in the following summer.
“Both long-term climate trends and short-term weather patterns significantly influence wildfire behavior and risk.”
Paul Ward | Head of Property and Casualty WTW
Therefore, both long-term climate trends and short-term weather patterns significantly influence wildfire behavior and risk.
The immediate damage from a wildfire may be obvious,with huge destruction caused. But there are also secondary dangers to worry about. For example, wildfire-induced air pollution has far-reaching impacts, as seen with Canada’s 2023 wildfires, which affected over a third of the US population.
This degraded air quality has severe health consequences, contributing to approximately 340,000 premature deaths globally each year[5].
A range of tools can help organizations to identify and quantify the wildfire risks they may face. First, mapping tools such as WTW’s Global Peril Diagnostic can help organizations identify the specific locations where they have property or operations that are potentially vulnerable to wildfire risk.
Each location is awarded a risk score according to the extent of the danger. It is also possible to assess the risks posed by active wildfire events globally, allowing organizations to take quick action to protect their operations.
Next, it is possible to use catastrophe modeling tools to estimate the potential losses that a wildfire could cause an organization to suffer. Such tools take into account the value of the property and assets at risk.
They depend on good-quality data – both about the nature of the assets and points related to wildfire risk, such as the distance to vegetation and fuel types at the location.
Using the results of this work, natural catastrophe specialists can help organizations to build a much more granular picture of where their potential for losses from wildfires is greatest. The analysis also provides a means with which to assess whether existing risk mitigation measures, including insurance, are sufficient.
7% of the total insured value of a business's portfolio with operations across the US, Canada, and Mexico was found to be exposed to medium or high wildfire risk.
For example, one recent analysis of a business with operations across the US, Canada and Mexico found that 7% of the total insured value of its portfolio was exposed to medium or high wildfire risk.
After modeling various scenarios to calculate the maximum likely losses from wildfires in exposed areas, the organization discovered that it was very unlikely to suffer damage that would breach the limits of its existing insurance structures. It was also able to explore risk mitigation strategies for its highest-risk properties.
Traditional insurance products can help organizations protect themselves against the risk of wildfires. Using the results of catastrophe modeling – including deterministic and probabilistic estimates for property damage, business interruption and other losses – organizations can assess how much insurance they may need, as well as what level of premium is justifiable.
Parametric insurance may also have a valuable role to play in helping organizations to manage wildfire risk. This is cover that pays a set amount to the policyholder in the event of a specific threshold being met, rather than according to their losses.
For example, the policy might pay out a specified sum if a wildfire burns out a certain area of land with satellite imagery used to make the assessment.
Parametric insurance can be useful for covering gaps left by property policies – perhaps where certain types of risk are not covered, or where higher excesses or lower limits apply.
For example, one leading agribusiness company had traditional insurance in place to cover 1.6 million acres of commercial pine and eucalyptus plantations, with an insured value of $1.6 billion.
But several years of major fire losses meant its existing insurance was becoming unviable. It therefore took out parametric insurance that would pay out only for specific fire damage detected by satellite imagery; carefully compiled data enabled insurers to get comfortable with the risks involved.
Parametric insurance cover is transparent – policyholders know what claim amount they will receive in specific circumstances – and claims are usually settled quickly, since no formal loss adjustment process is required.
The pay-out can usually be deployed in any way the organization sees fit – including for costs such as non-damage business interruption or supply chain disruption, which traditional property insurance may not cover.
However, policyholders must accept the policy won’t pay out if the trigger level is not met, even if they have suffered losses.
In practice, every situation is different. The most appropriate way to manage risk will vary from one organization to the next, depending on its individual circumstances. The starting point is to assess exposure – that will define the right response.
Contact us to discuss how we can help you through this process to manage risk more effectively.
