Fires Spur Interest in Risk Assessment Tools
The devastating California wildfires, estimated by some industry sources to have caused insured losses of up to $50 billion, are prompting a greater embrace of risk management technology designed to mitigate wildfire risk. Experts suggest that more advanced and accurate data and modeling can help insurers better assess the risk of wildfires, but that communities and policyholders also need to build greater resilience to withstand these events.
The California Department of Forestry Protection confirmed in late January that the Palisades and Eaton wildfires, which ignited in early January after a Santa Ana wind event and destroyed numerous neighborhoods across Los Angeles County, had been contained. Wildfires, severe convective storms, and winter storms are now considered frequent perils, according to Karen Clark, president and CEO of Karen Clark & Co., a catastrophe modeling company. “We never called them secondary perils,” she said. She explained that these frequency perils need a different approach, using physical modeling technology that incorporates atmospheric conditions, machine learning, and high-resolution wind patterns.
KCC demonstrated its wildfire modeling capabilities at its annual client meeting last June, projecting a hypothetical $30 billion wildfire event. “This fire unfolded exactly the way we said it could happen, with very dry conditions, random ignition, and a strong Santa Ana wind event,” Ms. Clark stated.
Lianne Bosko, New York-based property lines technical director at Zurich North America, emphasized the availability of robust tools for assessing wildfire risk. “The problem for insurers is that you can have a tool that tells you what the risk is, but the risk is highly dependent on how things are implemented on the ground, how we’ve built our structures, how we’ve designed our communities, the sorts of resilience that we’re building into these areas, or not building into them,” she said, highlighting that this aspect is more challenging to assess.
Pat Blandford, CEO and founder of Green Shield Risk Solutions, a managing general agent based in Chicago, believes the industry will increase its focus on exposures in the western U.S. and rely more on models. Green Shield focuses on risk mitigation and loss avoidance during underwriting, evaluating building materials, and addressing vegetation around properties. This includes ensuring combustible materials are at least five feet away from structures and eliminating dead or dying vegetation within 30 feet.
Advances in data and modeling have also supported the expansion of the parametric insurance sector to include wildfire risk. This type of coverage, used for perils such as windstorms and floods, is triggered by agreed data points. Cole Mayer, San Francisco-based head of parametric at Aon PLC, noted substantial development in the parametric sector to cover “secondary perils” like wildfires and severe convective storms, driven by improved data availability. He explained that parametric triggers are based on independent indexes correlated with loss and underlying exposure. “That requires data that’s calibrated accordingly, readily available, dependable, and reliable,” he said, adding that improvements in data reliability and availability are ongoing. This progress has made capital providers more comfortable with risk quantification.
Guillermo Franco, New York-based global head of catastrophe risk research for Guy Carpenter & Co. LLC, stressed the critical nature of modeling for parametric coverage. He highlighted the unique modeling challenges of wildfires, due to atmospheric changes like wind patterns and shifts in vegetation that act as fuel. However, he noted that while some insurers are still hesitant to fully trust these tools, wildfire modeling is improving and anticipates further progress in the next few years.
Our Kettle Inc. (doing business as Kettle), a managing general agent, uses a proprietary wildfire model, according to Isaac Espinoza, its San Francisco-based CEO. A significant portion of the company’s venture funding was dedicated to building the model. The model incorporates several “modules” that work together. “First we have what we call an ignition model. This ignition model is based on a number of variables contributing to where the actual wildfires can start,” he said. “We also have what we call a spread model. The third is what we call a building vulnerability model, and that is taking into consideration the partial loss component based on features surrounding the home that contribute to the burnability of a property.”
Parametric Insurance Products Make Inroads
Parametric insurance coverage for wildfires grows interest as a valuable asset for insurers as fire continues to expand. This coverage acts as a reinsurance product for a primary portfolio of residential insurance or a primary policy for a commercial or a residential structure. These customizable products include, for example, a “fire-in-a-circle” policy for high-value properties that pays out if a fire occurs within a certain radius, up to more sophisticated ‘burnt area’ structures that assess the quantity of burnt hectares, according to Tanguy Touffut, co-founder and CEO of Descartes Underwriting SAS.
According to Guillermo Franco of Guy Carpenter & Co. LLC, the number of providers has increased. He notes how reliable data and reporting, such as NASA’s Fire Information for Resource Management system which provides satellite imagery, has bolstered the feasibility of parametric fire coverage. Our Kettle Inc.’s fire in parcel coverage is written on an excess and surplus basis through a Lloyd’s of London syndicate. It provides limits up to $10 million for policyholders like homeowners associations, golf courses, and wineries, according to Isaac Espinoza, CEO, who notes that Kettle sold its first coverage in 2021 and has over 100 policies in place.
Laurent Sabatié, co-founder and executive director for London-based Skyline Partners Ltd., a managing general agent specializing in parametric coverage, stated that they are seeing “many, many more” inquiries. “We’ve seen demand for commercial property wildfire to cover carve-outs and sublimits for high-net-worth homeowners,”
