Approach to wildfires reset
Increasingly severe losses from wildfires in recent years have implications for how insurers and reinsurers approach this peril and price it, Robert Muir-Wood, chief research officer at RMS, told Monte Carlo Today.
“Before last year, it wasn’t a primary issue because it was an attritional loss. However, insurers and reinsurers will now be checking for the aggregates in California, particularly in places where wildfire can have a greater impact,” said Muir-Wood.
He explained that the market is now shifting, and while reinsurers may not have asked to see California aggregates when pricing their capacity, insurers will now be expected to demonstrate what their expected losses would be from wildfires.
“The industry has to take into consideration how the exposure is changing, how an increasing number of people expose themselves to this risk, and also how the climate is changing,” he said.
In terms of covering the immense cost of this peril, Muir-Wood explained there are two current levels of activity.
“The largest of all the fire losses last year was the Tubbs fire at the beginning of October. It was fairly unambiguous that the fire started with some sparking of electrical transmission equipment in very strong winds.
“There’s a lot of movement going on to see if utility companies are not accidentally considered responsible for all the losses, so there’s some politics going on at that level,” he said.
“On the other end, clearly insurers want to know where they can recover premium to pay for their losses. It’s hard for them to simply raise the price of insurance in California because there are laws in place to restrict that. In this case they may simply refuse to offer coverage.”
As a result of these ongoing issues, there is also the concern that wildfire risk could eventually become uninsurable.
Muir-Wood said that this is the case in certain places, where a number of people can’t renew their policies. For people who can’t obtain insurance through the private market, they will often look to the California FAIR Plan, which insures dwellings and commercial properties located in wildfire-prone areas.
“You can see the situation has some similarities to what happened in California with earthquake insurance after the Northridge earthquakes in 1994. Insurers were not able to raise the price and potentially had to withdraw the coverage. It’s definitely a challenge.
“Clearly if we now have five years where the wildfires are not too intense, the system may cope. But if there’s another year like last year, it’s going to become increasingly hard for people who live in rural regions outside the major cities of California.”
While the wildfires in Mendocino County this year were the largest in terms of area burned of any wildfire in California in the last 100 years, the fires have been consuming mostly forests, and had destroyed only around 300 buildings.
There was another fire in Shasta County further north, known as the Carr fire, which moved into the town of Redding. That one went through between 1,000 to 1,500 buildings—pushing up the insurance losses more than in Mendocino.
By contrast, the number of homes consumed by fire in California in 2017 was 14,700, so the fires of this year have only been 10 percent in terms of the likely number of destroyed buildings and also in terms of insurance losses.
“The total loss for the fire season last year was about $12 to $13 billion. So far this year, we have had only around 10 percent of that, as the areas which have been burned have been poorer areas this year than they were last year,” he said.
Muir-Wood suggested that a number of factors are driving this increased wildfire exposure, one being the drought which has lasted for three to four years.
At the end of December 2017, a census in California showed there were as many as 129 million standing dead trees which, Muir-Wood said, contribute to how rapidly these fires can spread.
