As smoky skies and poor air quality continue to burden cities up and down the West Coast, 1,975,116 homes in the US with an associated reconstruction cost of more than $638 billion are at elevated risk of wildfire damage, according to global property information, analytics and data-enabled solutions provider CoreLogic.
Its 2020 Wildfire Risk Report found that these homes comprised approximately 6.5 percent of the total number of single-family residences in these states.
The CoreLogic report analyses both single-family and multifamily homes currently at risk of wildfire damage in the most wildfire-prone states. The Los Angeles metro area tops its list of metropolitan areas with the greatest number of single-family residences at wildfire risk, closely followed by the Riverside and San Diego metro areas.
California is home to 76 percent of the residences on the top 10 list.
“2017 and 2018 were extremely destructive, record-setting years for wildfires, followed by a comparatively quieter 2019.
“When we talk about wildfire trends, it’s important to treat any decrease in fire activity as only temporary,” said Tom Jeffery, principal hazard scientist at CoreLogic.
“Like most natural hazards, there is no reason to believe that the amount of wildfire acreage, or the number of homes in the path of future wildfires will be any lower—and certainly the ongoing 2020 season is proof of that, well on its way to being among the most devastating in recent memory.”
The devastation in Oregon, Washington and California has led to the loss of dozens of lives and thousands of structures, and recovery from these wildfires is a process that can take years. Santa Rosa, home to the Tubbs Fire in 2017, and Paradise, where the Camp Fire blaze took place in 2018, are both still in the process of rebuilding.
This year, the COVID-19 pandemic has created additional complications to an already deadly peril, and with the potential for disruptions to the supply chain for raw materials, manufacturing and transportation, this effort could be further challenged.
Insurance activities may also be challenged with an influx of claims and fewer adjusters to review damages, making automation and virtualisation more important than ever to supporting policyholders.
“It’s important to treat any decrease in fire activity as only temporary.”
Tom Jeffery, CoreLogic
CoreLogic helps carriers pinpoint fire hazard risk to establish better policy premiums without extensive on-site visits. Virtual and DIY surveys are also less expensive than in-person solutions, providing a cost-effective and efficient solution for underwriters and claims adjusters.
“The business landscape is changing to right-size today’s challenges. Wildfire risk presents a case study for this,” said Mick Noland, executive, general manager, Insurance Solutions at CoreLogic.
“A single event can completely destroy a home. It is vital for insurers to have a complete view of each unique property to ensure adequate coverage and support in the wake of a catastrophe.
“Next-generation integrated insurance solutions, based on a foundation of granular data and insights, are the key to protecting families and businesses—and ultimately, the health of the housing ecosystem—from the threat of financial catastrophe.”
Discussing the implications for the insurance industry further, Tom Larsen, CoreLogic’s Insurance Solutions principal, said: “Wildfire risk is pervasive in the US—the results of the last few years were not anomalies. A very large portion of the US is at risk.
“Wildfire is a risk that is broadly distributed throughout the US, and conscientious risk management can lead to a successful business for insurers and to risk strengthening by policyholders.”
Managing the risk
Larsen noted that wildfire risk can be quantified—and if it can be quantified, it can be managed as a financial risk.
However, the massive wildfires in the last few years have highlighted several distinct challenges for the re/insurance industry: first, loss severities today are magnitudes higher than a simple regression of the loss experiences of the past decades; and second, risks that appeared benign at the time of underwriting have shown a much higher loss potential than perceived at underwriting.
The public record shows the last three years have seen multiple carriers reaching their catastrophe reinsurance layers for wildfire, something unexpected after decades of lower loss levels. One insurer became insolvent, and other insurers have had strategic capital challenges as a consequence of the losses from the fires.
“Insurers must either allocate more capital to pay for potential fire losses or lower their loss potential.”
Tom Larsen, CoreLogic
“The science (and the continued pace of massive fire events in the west) indicates that while we may be in a current elevated state of risk, the potential for large fire losses persists,” said Larsen.
“The consequence of this increase in the loss expectation is that insurers must either allocate more capital to pay for potential fire losses or lower their loss potential. Using the experience and practices developed in managing hurricane and earthquake concentrations, insurers are beginning to manage regional aggregation of risk more strictly.
“Reviews of the property losses from recent events have identified large numbers of properties outside the designated wildfire areas that have a low (but non-zero) level of risk.
“Within the wildfire areas, there is a greater understanding that the risk levels are not uniform. The challenge for insurers who seek a compelling product for their policyholders is to better align the price with the risk they are accepting, and this is encouraging focus on risk pricing.”
Larsen noted that the insurance industry is responding to the challenges of wildfire with individual property risk rating (moving away from block or territorial rating systems), regional zonation and aggregate risk management with models.
In the future, he expects a focus on making homes more resistant to wildfire ignition and destruction.
“Risk reduction credits will need to be appropriate and transparent,” he said. “There will be a shift in some communities towards more pre-emptive wildlands management (such as prescribed burns and broad fire barriers around housing enclaves).
“For insurers, this implies a need to evaluate pricing credits for regional risk reduction.”
He also predicted greater clarity in the pricing and aggregation of property insurance and liability insurance coverages that may be exposed to wildfire loss occurrences.
Main image: shutterstock.com / hkalkan