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Knowledge of wildfire risk vital in developing a proper underwriting strategy: Guy Carpenter

10th September 2019 - Author: Luke Gallin

Losses from wildfire events have increased significantly over the past couple of years, and as a result, it’s important that insurers and reinsurers have solid understanding of the exposure in order to maintain a sound underwriting strategy, says Managing Director, Guy Carpenter, Robert Reader.

california-wildfire-powerlinesUnderpinned by the devastating impacts of the California wildfires in 2018, recent outbreaks in Australia and Canada as well as in certain parts of Europe, insurers and reinsurers are facing increasing losses from wildfire events.

“Wildfire-related losses have significantly increased in the past several decades as more and more properties have been built in such areas — the areas where human development encroaches on and interacts with natural woodlands or vegetation that is at high risk for wildfire,” Reader explains. Concurrently, changing weather patterns of precipitation and winds are clearly influencing wildfire activity.

“As industry stakeholders work to manage wildfire exposure, all types of carriers must refine customer selection using enhanced underwriting techniques or risk adverse selection to prevent a potentially catastrophic claims event. While personal lines may be the most affected line of business, commercial portfolios can also be exposed,” says Reader.

Guy Carpenter, the reinsurance arm of global brokerage Marsh, explains that over the past ten years, urban planning has had a focus on utilising fire-preventative materials to provide additional structure resilience. However, warns Guy Carpenter, in the event of a large-scale fire the resources available for fire departments become stressed.

By their very nature, wildfire events can be unpredictable and the damage caused can vary significantly.

“Insurers writing in areas with high wildfire risk could sustain abnormally high losses compared to their peers. Without knowledge of the risks, (re)insurers cannot develop a proper underwriting strategy that takes the specific risks into account. Relying on historical data only is not adequate for estimating wildfire risk because of the changing nature of the risk due to the development of the WUI.

“Insurers must evolve their risk assessment strategies using catastrophe models that account for a wide range of complex factors and do so on a regular basis as the territorial factors change over time,” says Reader.

“By examining total accumulations and market share, and seeing the risk from as many angles as possible (including the frequency, severity, location, and structures driving the risk), carriers can get a handle on their wildfire risk. At Guy Carpenter, we analyze and develop data sets and tools to pull out insights that provide multiple views of the risk to help each client select risks at the point of sale and manage their aggregation. Running a simulated event set reveals how often locations might be affected by large fires.”

“Aggregating risk over the footprints of real wildfires provides a more realistic view of a carrier’s risk. We also take into account factors that may lessen or increase the risk in that area (for example, the type of vegetation cover). Combining the latest wildfire science with deep knowledge of underwriting strategy, we are able to equip carriers with the tools they need to understand how wildfire could affect their portfolios,” he says.

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