Fire Stopper

A year after Canada’s most expensive natural disaster, reinsurance experts suggest that the Fort McMurray wildfire was not financially significant worldwide, yet still “captured the attention” of the global reinsurance industry and highlights the need to manage risk through programs such as FireSmart.

The Horse River wildfire was detected on the evening of May 1, 2016 when it was about two hectares in size and approximately seven kilometres southwest of Fort McMurray, Alberta; two days later, the city was evacuated, consulting firm MNP LLP states in its recently released report, A Review of the 2016 Horse River Wildfire, commissioned by Alberta Agriculture and Forestry.

In a separate report, KPMG LLP’s May 2016 Wood Buffalo Wildfire Post-Incident Assessment Report — dated May 2017 and commissioned by Alberta Emergency Management Agency — notes that the financial and economic impact is estimated at about $8.9 billion, with insured losses estimated at about $3.6 billion, citing figures from a MacEwan University report and an Insurance Bureau of Canada press release respectively.

About 85% of the insured losses from the wildfire were covered by reinsurance and most of that was covered by European reinsurers, analysts for A.M. Best Company Inc. noted last year during the rating firm’s annual Insurance Market Briefing Canada in Toronto. That estimate had not changed as of June 2017, says Gordon McLean, senior financial analyst for A.M. Best.

“While it was a significant event, I don’t know that it’s a catalytic event that is going to change the manner in which business is conducted,” McLean recently told Canadian Underwriter.

AXIS Re Canada, for example, reports that “we have not changed our strategy or approach to reinsuring natural catastrophe risks as a result of the Fort McMurray wildfire.”

In general, McLean states, “it was an earnings event and not a balance sheet event.” Among the affected reinsurers were Munich Re, Swiss Re and Hannover Re, which noted in their 2016 annual reports the event cost them 404 million euros, US$229 million and 128 million euros, respectively. To that, the Corporation of Lloyd’s reports the wildfire was one of two events in 2016 for which the net incurred loss to the Lloyd’s market exceeded 250 million pounds.

The wildfire “was largely financially insignificant to the reinsurance industry on a global scale,” concur Riley Doolittle, vice president of Guy Carpenter and Company LLC, and Kevin Kernohan, the firm’s assistant vice president. “However, this wildfire event in a small, remote Canadian city still managed to capture the attention of the reinsurance industry worldwide,” Doolittle and Kernohan say, suggesting that one reason for this is it was a non-modelled peril at the time of the event.

“The forest fire hazard is a modelling challenge due to a variety of influencing characteristics and conditions, such as temperature, humidity, precipitation trends, phase in the [El-Nino Southern Oscillation]  cycle, winter snowpack and snowmelt rates, wind and cause of ignition,” they explain. “Reinsurance companies will need to re-evaluate exposure concentrations and accumulations and how they charge for non-modelled perils, particularly wildfire,” they add.

“Being the largest reinsured catastrophe in Canadian history, there was certainly a lot of concerns about reinsurance from affected clients,” says Paul Cutbush, senior vice president of catastrophe management at Aon Benfield Canada. “Certainly, price was affected by the fire,” Cutbush says, but adds it affected Cat programs “differently depending on how much loss was for each client.”

That said, price increases “were not as severe, probably, because of the overcapitalization of the global reinsurance.”

However, the disaster “tested the appropriateness of insurance companies’ reinsurance programs in relation to limits purchased and contract language,” say Doolittle and Kernohan. For example, they report an Alberta-based insurer informed its reinsurers that it intended to collect on two policy limits as a result of “contract language that allows for an event which exceeds a specified duration to be split into two separate events.” That insurer’s collection was “still being negotiated” as of late June, they told Canadian Underwriter.

“That fire could have burned for six months and not gotten near anything,” Raymond Thomson, associate director for A.M. Best, points out. “It just happened to close in on Fort McMurray.”

Cutbush reports that, including oil company property, there was probably about $50 billion in property value exposed in the Fort McMurray area. “I really do think it was one of the worst-case scenarios we could ever see,” he says, although “we had 88,000 people literally living in the middle of the woods.”

IMPROVING RESPONSE

What was and could have been are among the risk management issues being explored and that will demand response to prevent or mitigate similar losses.

Of the 10 recommendations made by MNP, seven “are in process,” while the other three have been completed, a spokesperson for Alberta Municipal Affairs (AMA) reports in an email. Of KPMG’s 21 recommendations, work is under way on 16 and starting on the remaining five, the Alberta government noted in early June.

For example, the latter report recommends that Alberta’s Office of the Fire Commissioner “be given authority and appropriate resources to work with local authorities to create a provincial inventory of municipal firefighters (including wildland-urban interface-trained professionals) that can be deployed during an emergency.”

The AMA spokesperson writes a provincial inventory of municipal firefighter equipment and specialty training that the province could call upon in support of communities is already in place and was used in the Wood Buffalo fire. In accordance with KPMG’s recommendation, however, the inventory “requires better technology support to make it more efficient,” she notes.

With regard to the MNP recommendations, one calls on the government to “emphasize a long-term vision for FireSmart within the province that includes community responsibility, multi-agency collaboration and an outcome-based approach to implementing FireSmart projects.” The spokesperson writes Alberta “nearly quadrupled” funding available for the program this year.

Despite Alberta being a leader in developing and applying FireSmart principles, MNP notes the Fort Mac fire could not have been stopped even if more program work or more vegetation management had been done.

“When you look at the intensity of the fire, how quickly it escalated,” says McLean, “it was escalating despite the fact that they were applying resources against it.”

Even so, the Alberta government should work to apply or deploy aspects of the FireSmart program in communities vulnerable to wildfire damage, argues Blair Feltmate, head of the Intact Centre on Climate Adaptation at the University of Waterloo. Although supporting recommendations in both reports, “if anything, I thought they underplayed the utility of the application of the FireSmart program,” Feltmate says.

“Under extreme conditions, it may very well be that there is nothing you can do by way of prevention, but there is an awful lot between zero and extreme events,” he points out.

Noting that he has spent time with both insurers and reinsurers since the Fort McMurray wildfire, “almost universally there is a feeling, and I happen to agree with it, that the bulk of the emphasis going forward should be on prevention and the application of the FireSmart program and other aspects of preventive maintenance that might limit the probability of major fires causing pervasive damage in communities, particularly throughout the boreal.”

To address wildfire risk, Feltmate predicts reinsurers will be “more engaged on the side of the equation of investing in preventive measures, like being part of the solutions equation.”

Citing the insured losses from the event, “for the square root of the square root of that number, we could have applied the FireSmart program and maybe not eliminated the Fort Mac fire, but certainly limited the amount of damage realized by it,” he argues. Some options for limiting damage, he says, include focusing on firebreaks around vulnerable communities, particularly on the boreal; fireproof shingles, siding and decking material; not storing firewood along and in close proximity to houses; and keeping brush away from homes.

NOTE: A previous version of this article erroneously reported that KPMG cited Insurance Bureau of Canada as estimating the financial and economic impact of the 2016 Alberta wildfire was $8.9 billion. KPMG in fact attributed that figure to a report from MacEwan University. Canadian Underwriter regrets the error.