Wildfire risk is considered a ‘new major peril’ by reinsurers, says Guy Carpenter

Wildfire risk is considered a “new major peril” by reinsurers after the heavy losses of recent years. But the industry has a much better understanding of this risk following investments in risk models and better education about the nature of the risk.

That is according to Rob Reader, managing director Guy Carpenter, who told APCIA Today that the perception of wildfire risk has moved from its being seen as an “incidental peril” prior to 2015, and a “secondary peril” after the losses of 2017 it has been upgraded again after 2018.

“Clearly, the market is more informed,” Reader said. “Underwriters have turned to modelling tools and have gathered large amounts of data in order to improve their techniques and approach.

“Many have employed aggregation techniques and others have attempted to seek a balance between premiums and exposures.”

He said companies have established differing opinions on the accuracy of the models and the outputs, often developing their own individual approaches.

“The market is more educated, but the educational process is not complete and the theories of application in the future have not yet been tested,” he said.

“As with all major perils, frequency and exposures can be measured only over long periods of time in order to achieve an underwriting balance of profitability for an insurer.”

Reader said that another active wildfire season in California in 2019 could cause a further readjustment for the market—but he stressed that the industry is very resilient.

“The financial integrity of the insurance market is very strong. An ‘active wildfire season’ would have to be defined. How many fires? Where are they located? What type of losses would they produce? What caused the wildfires?” he explained.

“Future market responses vary depending upon what occurs. The re/insurance market is very resilient, and underwriters have faced catastrophe losses greater than those of 2017 and 2018 in prior years.

“Underwriters will face larger losses in future, from unforeseen events such as the World Trade Center losses of 9/11 in 2001.”

He stressed that it is normal for markets to expand and contract capacity based upon historic loss events, but that generally the capacity trend increases over the long term.

“The intelligent underwriter must attempt to adapt to market conditions and discern between what is a trend and what is an aberration in loss experience. The difference is that going forward, a number of human efforts that have not occurred before are taking place to reduce wildfire frequencies.

“Legislation, fire-fighting resources, technology application, and community safety efforts are all contributing to the reduced frequency and severity of future wildfires.

“While these efforts are in their infancy, we already see this in 2019 in the wildfires reported to state agencies. The difficulty is that it is challenging to prove why fires didn’t occur after a season has passed,” he concluded.