With several intense wildfire outbreaks already recorded in California this year, and much of the season still to go, AM Best has underlined the challenge that re/insurers will face in adapting to a potential ‘new normal’ trend of heightened wildfire activity.
Although wildfire activity in 2019 thus far has been quieter than in the previous two years, the industry has still seen a number of major events.
For example, the Kincade Fire has burned through more than 76,000 acres in Sonoma County, while blazes across southern California pose a threat to an estimated 10,000 residential and commercial structures.
Re/insurers also seem to be aware that activity could pick up very quickly, as experts predict that the greatest fire potential will occur from October through December as the Santa Ana winds pick up.
AM Best noted that catastrophe modelling firms are already adjusting to ‘new normal’ trends based on recent events, but added that the modelling techniques for wildfire remain less sophisticated than for hurricanes and earthquakes.
In addition, the growth of housing in the wildland-urban interface, combined with weather conditions that caused embers to spread further than anticipated, have driven losses in areas that have historically been view as having relatively low wildfire risk.
Given that wildfires are now increasingly occurring in areas classified as low to moderate risk, AM Best believes risk-scoring models may need to be adjusted.
Much of the market share in California is held by the larger national companies, who have significant capital to manage the peril and comprehensive risk management strategies, including robust reinsurance programs.
But give the uptick in wildfire activity over the last few years, many companies have been pushed to adapt their risk management approach via pricing, re-underwriting, and improved risk scoring matrices.
As has been the case in recent years, analysts expect to see an increase in reinsurance pricing in loss-affected areas of California, which would result in higher reinsurance costs for the primary carriers, as well as a tightening of terms and conditions.
“As insurers look at the last three years, the sheer number of events and their severity will undoubtedly lead them to continue their re-examination of this peril,” AM Best stated.
“Insurers’ enterprise risk management frameworks will be challenged by these events and they may have to re-examine their risk appetites, capital management strategies, and reinsurance partnerships.”
