August 20, 2020 by Robert Muir-Wood, RMS
When evaluating unexpected catastrophe risks, our experiences can be sparse. Widening our knowledge by going back in time, by exploring the ‘near-misses’ and by expanding our geographic horizons is critical.
Fortunately, big catastrophes are rare. This is good in that it allows an insurer to build up reserves over many years, and for governments to invest over the long term in making cities more resilient.
The Fort McMurray fire in 2016 is Canada’s most expensive catastrophe. About 10% of all the structures in the town were destroyed, including 2,579 homes, and the cost of all damages and disaster management was set at $8.9 billion. Most homeowners in the city had fire insurance, which paid out around $3.6 billion in insured damaged. However, many insurers — and their reinsurers — had not anticipated a Canadian fire loss of this magnitude.
So, how should the full cost of this risk be calculated for homeowners? Could risk be reduced in reconstruction? Further, where else in Canada were such urban fire disasters anticipated?
To help answer these questions, we need to look to the broader experience of fire loss across North America — and in particular from California. Since the Oakland Hills fire of 1991, RMS fire researchers had highlighted the potential for a wildland fire, fueled by vegetation, to transition into an urban conflagration. In such a scenario, the fuel would also be comprised of the closely-spaced wooden houses themselves.
In the Tubbs fire of October 2017 in Northern California, windblown embers brought the fire into the suburban center of northern Santa Rosa, consuming 2,900 homes. The RMS wildfire model for the U.S. and Canada captures ember-driven, urban fire-spread as a separate hazard model to the conventional vegetation-fuelled fires.
Including ember modelling highlights that many suburbs that may have considered themselves safe from wildfire hazard are potentially at risk. In its 2019 report on the Fort McMurray fires, Zurich Insurance Canada highlighted that “entities working to produce wildland fire risk maps for Canada would be well-advised to incorporate learnings from California in developing similar products for the Canadian market.”
The risk of an earthquake looms over the west coast of Canada. Should ‘The Big One’ happen, the insurance loss could reach an eye-watering $35 billion. Even while the threat is well recognized — and an impressive 55% of Vancouver homeowners have earthquake insurance, four times higher than the percentage in California — the last significant earthquake in the vicinity of Vancouver was in 1946. Almost no one in BC has firsthand experience of a large earthquake catastrophe. That is why we should see what lessons can be learnt from elsewhere.
The richest recent experience of earthquake impacts on a major developed-world city comes from New Zealand. Up to half the damage from separate earthquakes in 2010 (Canterbury) and 2011 (Christchurch) was attributed to liquefaction. Liquefaction, which we now understand and model, brings a completely different damage mechanism to shaking. In fact, a building may be completely unaffected by shaking but still present a total loss, because differential settlement into a liquefied soil can mean the floors of the structure are no longer level.
One area in Canada that has many similarities to liquefaction-prone sediments is the Fraser River delta next to Vancouver. An international airport and the city of Richmond are situated in the liquefaction zone.
Insurers in B.C. need to check that they are modelling both the shaking and the liquefaction impacts. And that is before including the potential for another source of urban conflagration — fires triggered by strong shaking and liquefaction.
Before 2020, if an insurer had attempted to sell additional pandemic business-interruption coverage, they would have had few takers. The risk would have been viewed as theoretical, the risk-cost assessed as expensive.
The COVID-19 pandemic continues to be a true global catastrophe. It was not, however, unanticipated. Speculation about the potential for global spread followed the SARS outbreak of 2002 and 2003, a coronavirus that was more lethal than Covid-19.
SARS, and its 2015 ‘cousin’ coronavirus MERS, were ‘near-miss’ global pandemics. All it would have taken is a further mutation and a breach in the public health measures, and we could have had a pandemic 17 years earlier.
We need to consider these near-misses when pricing pandemic insurance through performing ‘counterfactual’ risk assessments, evaluating what might have happened, and with what probability. Above all, the risk for a pandemic is truly global.
In the United Kingdom, a working group (of which I am a member) is on a mission to prepare to launch a 2021 national pandemic business-interruption insurance product. To price insurance will require modelling the risk probabilistically, something that we first attempted for pandemic business interruption more than a decade ago. The product will require significant government financial support.
Meanwhile the risk landscape is shifting. Governments are busy learning from each other as to the optimum strategies of testing and tracing, so as to reduce the economic impact of a second wave of COVID-19, or of some future pandemic. And businesses are exploring how they could be allowed to re-open in a future lockdown, through minimizing human contact.
Insurance coverages will have their role, fitting alongside and even motivating risk reduction, whether from a wildfire, liquefaction or a pandemic. Increasingly, every significant catastrophe provides its global lessons.
Robert Muir-Wood is chief research officer at RMS and is based in the United Kingdom.
Feature image by iStock.com/milehightraveler