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Wildfire losses expected to increase: Lloyd’s

September 26, 2013  

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All that remains of a house in Slave Lake, Alberta, on Monday, May 16, 2011 is a set of steps. Whole neighborhoods were flattened by a devastating wildfire that swept through the town of 7,000 destroying upwards of 40% of the buildings. (The Canadian Press/Ian Jackson/Slave Lake, AB, Canada)

Catastrophic wildfire losses are on the rise, but it’s not just property insurers that are expected to bear the brunt of future claims. According to a new report from Lloyd’s, insurers across several lines of business are warned to be mindful of their exposures, and are reminded that they have an important role to play in mitigating future wildfire risk.

US wildfires cost the US insurance market $595m in 2012 alone, and according to the new Lloyd’s report, Wildfires: A Burning Issue for Insurers?, insurers can expect losses to increase.

Globally, wildfires have caused $52.3 billion in economic losses since 1984, the report says, and the US—one of the countries hit most frequently by wildfire catastrophes—experienced losses of $28.5 billion between 1980 and 2011.

Read: City Under Fire

“Many of the properties at risk from wildfire are very valuable, meaning wildfires can lead to very high economic losses as well as insured losses,” said Sandra Gonzalez, Emerging Risks and Research Executive at Lloyd’s, in a press release.

However, she adds, wildfire risk is still relatively small compared to some of the larger catastrophe perils, such as hurricanes or earthquakes, which cost the insurance industry far more in losses each year. Tornadoes, for example, cost the insurance industry more than $25 billion in 2011 alone, according to the report.

Property is the most exposed line of business to wildfires, as the majority of loss results from burned property structures and their contents, and these losses are usually heavily concentrated in residential areas. “Largely, wildfires affect homes that have been built on the outskirts of cities. However, there is an occasional business risk. For instance, colleges and universities can be located in areas that are prone to wildfires,” said California-based Wade Pitman, Western Property Manager for XL Insurance.

Read: Greatest threats posed by climate change

Yet wildfires are not exclusively a property peril, and in fact affect several non-property insurance lines. “When you think of natural peril the first line of business that comes to mind is probably property, but wildfires are also a big risk for liability insurers,” says Gonzalez, explaining that wildfires are one of the few natural perils that can be caused by human activities, such as poorly maintained power lines.

Following a wildfire, business interruption may also occur, with sectors most at risk including forestry and agriculture. Motor is another line of business that can be affected by wildfires. Following a wildfire event, there may also be repercussions on health insurance because of secondary health problems caused by smoke, smog, burns or even water contamination from the fire, the report says.

According to the report, insurers should expect to experience increased losses from wildfires going forward. Many studies, it says, show that the world may experience a future increase in wildfire activity, driven by socio-economic and human factors amongst others, with one study projecting “substantial and rapid shifts across vast portions of the globe”.

“The combination of predicted increase in global temperature and extreme climatic conditions, coupled with a growing world population and land use changes is expected potentially to lead, overall, to increased fire occurrence, area burned and probably also more severe and damaging wildfires,” the report states.

Read: Innovative climate change adaptation strategies needed

In addition to this, many fire-prone landscapes have seen increasing urbanisation in recent decades. For example, the Wildland Urban Interface in the US grew in area by 19% during the 1990s, and in 2000 it represented 38% of all housing units for the lower 48 US states, according to the report. Wildfire severity and intensity would also be expected to rise with increasing temperatures, particularly where increased severity of droughts leads to very dry fuel conditions, the report says.

Between 2002 and 2011, the report says, wildfires accounted for $7.9 billion in insured losses in the US, an increase from the previous decade when insured losses from wildfires were estimated at $1.7 billion. “If anticipated predictions of increasing wildfire and therefore associated economic losses become reality, and the current trend continues, an increase of insured expenses derived from wildfire catastrophes should be expected,” states the report.

Read: North America most affected by increases in extreme weather

“Urbanisation and global warming are changing the way we look at risk,” says XL’s Pitman, who expects pricing on wildfire risk to remain firm. “Insurers are likely to need to seek adequate rates to remain financially strong enough to protect their clients’ from wildfire risks,” he says.

Though modelling wildfire risk is challenging due to the changing nature of the climate, urban landscape and preventative measures, risk mitigation strategies can be implemented to reduce human and economic losses—many of which require action at the community and homeowner level. According to the report, insurers can play a key role in helping reduce future risk.

“One of the things insurers can consider doing is to engage directly with legislators as well as communities and individuals,” says Gonzalez. 

“Some governments have been considering introducing zoning regulations which will limit building in wildfire prone areas. The insurance industry could work with government to help facilitate that kind of legislation being passed,” she adds.

Pitman believes that “the biggest role that insurers can play in helping mitigate wildfire risk is to provide proactive guidance to their customers”.

Click here to read the full report.

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This story was originally published by Canadian Insurance Top Broker.