Analysts at Chaucer have argued that US wildfire should no longer be treated by re/insurers as a secondary peril, following a 30% rise in the number of major wildfires over the last 15 years.
The average number of US wildfires that have burned over 40,000 acres has risen from an average of 34.2 per year to 41 a year now, according to research by Chaucer.
The specialty re/insurer reported that, between 2006-2010, there were 157 fires over 40,000 acres, then 173 between 2011-2015, and finally 205 between 2016-2020.
And in addition to this growing frequency, wildfires are causing more financial losses and pose a bigger risk to property as humans extend building into the Wildland Urban Interface.
Chaucer says the risk of wildfire damage is increasing in part due to higher temperatures and shifting rainfall pattern causing more drought conditions, which is linked to the effects of climate change.
A pattern of dryer Springs and Autumns may have extended the duration of the wildfire season, and forest density has also increased, providing more fuel for the fires.
The increased risks posed by wildfires, in addition to the rising value of claims has put upward pressure on insurance premiums.
But as the shift of wildfires from secondary risk to primary focus is relatively recent, the science and modelling of this risk is much less mature when compared to some other perils, such as hurricanes.
Chaucer says wildfires are also more complex to model than the more conventional perils, such as hurricanes, due to numerous variables at play that can affect the size and intensity of the wildfire, for example how wind direction affects the travel of embers.
“Calculating the risk of wildfires is of key importance to the industry. The complexity of the peril is particularly challenging given how many shifting factors there are to consider,” said Ellen Gyandzhuntseva, Head of Exposure Management at Chaucer.
“We’ve undertaken a thorough review of our own internal modelling practices for wildfires and put together a framework for determining our own view of risk and managing our risk appetite for this peril,” Gyandzhuntseva continued.
“The respective approaches to modelling wildfire risk vary across the industry, leading to different views of what technical rates should be charged to insure this peril. With the severity and frequency of wildfires increasing together with social alertness to their risk mitigation, the challenge for insurers is to get comfortable that their models are suitably updated to reflect this trend in order to avoid being caught out by the peril. The consensus is that this threat is only going to continue to grow.”
