Is the growing threat of wildfire insurable?

MARCUS WINTER

Hello and welcome to Nothing Assumed, a quick talk on topics that keep the reinsurance industry up at night. My name is Marcus Winter and today it is my pleasure to welcome my special guest Roy Wright, President and CEO of IBHS and my colleague Mike Quigley, Head of Property & Multiline Risk Quantification at MRUS. Mike also serves on the Board and Executive Committee of IBHS.  Today we will discuss the growing threat of wildfires and what mitigation measures are available to protect both personal and commercial properties.

ROY WRIGHT

Thank you Marcus, I am pleased to talk about this important topic today.

MIKE QUIGLEY

Thanks Marcus. Happy to be here and glad to be back on the podcast.

MARCUS WINTER

Roy, I am so glad you were able to join us today. Can you tell us why wildfires are on the rise, particularly over the past few years and where they are most prevalent in the US?

ROY WRIGHT

• When it comes to wildfires, climate change is a threat multiplier.
• Extreme weather conditions, such as droughts and heat waves, increase risk and intensity of wildfires.
• A warmer climate has been directly linked to increased fire danger.
• Drier and warmer conditions lead to more volatile fuels, as vegetation becomes dry.
• No longer is wildfire season mid-summer to early autumn; wildfires are becoming a year-round occurrence. This trend is underscored by the Marshall Fire, which swept through Boulder County, CO, in late December 2021, destroying around 1,000 structures.
• The Wildland Urban Interface (areas where human development occurs near or in a wildland area) in the United States grew rapidly from 1990 to 2010 in terms of both number of new houses (41% growth) and land area (33% growth), making it the fastest-growing land use type in the United States.
  
• The vast majority of new WUI areas were the result of new housing (97%), not related to an increase in wildland vegetation. Within the perimeter of recent wildfires (1990–2015), there were 286,000 houses in 2010, compared with 177,000 in 1990. Furthermore, WUI growth often results in more wildfire ignitions, putting more lives and property at risk.
  
• Larger, more dangerous fires are generating wind-blown embers that spread miles from the main fire, igniting fires that burn larger areas.
  
• Areas burned at high severity saw an overall eightfold increase in western US forests from 1985 to 2017.

MARCUS WINTER

Thank you Roy for your detailed description of what we are facing here in terms of the prevalence of wildfires in the US. For hurricanes homeowners can reduce claims by reinforcing their structures, yet is this true for wildfires?

ROY WRIGHT

Individual can do things at a parcel level – need a collective level.  Community needs to take action.  This would have a more positive outcome in combatting wildfires.

MARCUS WINTER

I am going to change course now and ask Mike, from an re(insurance) perspective, what is the effect of wildfires on both personal and commercial lines of business?

MIKE QUIGLEY

• In recent years, numerous devastating wildfires have made it apparent that the risk is much larger than once thought. 
• Climate change, population migration from urban to more rural locations like Roy outlined and an increase in other catastrophic insured losses, such as hail, hurricane and flood, have increased the pressure on insurers to properly assess and underwrite wildfire risk.
• All of these factors have forced the insurance market into a period of transition and heightened uncertainty while insurers, reinsurers, policy makers, regulators and service providers scramble to implement strategies to address the new realities of insuring in wildfire prone areas.
• Particularly in California, the property insurance market has experienced issues of repricing, dislocation, and lack of availability. We have recently seen this manifest in the notifications by multiple large personal lines insurers in California that they are ceasing the writing of new business or, in some cases, planning to exit the state altogether from a personal lines perspective.
• For insurers, wildfire was long thought of as an attritional or incidental peril.  For decades, wildfire losses were small enough compared with total insurance premiums that wildfires were not a main consideration for pricing or underwriting.  That has all changed in recent years.
• The recent actions of carriers in California are a direct result of existing regulatory constraints that do not allow insurers to fully reflect the forward-looking expected costs of wildfires, whether they stem from the hazard itself or from the increased cost of capital to support their business.
• Consequently, the California FAIR plan has grown rapidly over the last couple of years.   
• The FAIR plan was designed as a market of last resort to temporarily provide coverage solutions when availability issues arise in the state.  A growing FAIR plan is a sign of a distressed market and poses another major issue for insurers given the potential for non-recoupable assessments if the FAIR plan suffers a major wildfire loss.

MARCUS WINTER

Roy given that wildfires are such a major concern, can you advise as to new mitigation measures in place or in the process of being developed that can help to protect property from this devastating risk?

ROY WRIGHT

• IBHS’ Wildfire Prepared Home program is the first-ever wildfire mitigation designation program. It allows homeowners to show they’ve taken the suite of science-based actions needed to meaningfully reduce their home’s wildfire risk.
• Based on the latest wildfire science from IBHS, the Wildfire Prepared Home program guides homeowners to address wildfire vulnerabilities in three key areas of their property – the roof, specific building features and defensible space – to address the home as a system.  
• Our research provides guidance on the roof:
  • Choosing a Class A fire-rated roof maintained clear of debris
  • Choosing noncombustible gutters and downspouts
• Building features
  
  • Installing ember and flame-resistant vents
  • Ensuring 6-inch vertical noncombustible clearance at the base of the wall

• Defensible Space
  • Creating and maintaining the 0-5 foot home ignition zone, including removal of branches that overhang this area
  • Clearing and maintaining the underdeck area
  • Maintaining yard clear of debris
  • Replacing combustible fencing within 5 feet of the home
• Wildfire Prepared Home includes built-in homeowner education, a system of required mitigation actions, an initial verification process, and an annual requirement to ensure ongoing landscape maintenance.  
• The program is now available in California, and includes two designation levels – Wildfire Prepared Home, which is ideal for retrofitting existing homes to resist ember ignition, and Wildfire Prepared Home PLUS, ideal for new construction or to further retrofit existing homes.

Marcus Winter

Thank you for expanding on the individual level…Can you tell us more about mitigation at the community level?

Roy Wright

• IBHS is also working on Wildfire Prepared Community, as we pursue actions that will add to a community’s resilience.
• The most catastrophic wildfires are those that move from wildlands into the suburban communities of the wildland urban interface.
  
• The probability of a wildfire-driven conflagration in the suburban environment can be broken down into existing elements that are generally out of our control (except in the case of new construction) and those variables that can be altered and adapted to meet mitigation requirements. The critical elements are:
  • Existing Factors
    • Environmental conditions
    • Surrounding vegetation
    • Community structural characteristic
    • Supporting infrastructure
  • Controllable Factors
    • Parcel-level mitigation actions
    • Fuels within the community
    • Community regulations
• At the scale of a community, IBHS has focused its work initially on identifying viable paths toward a community-level designation program.
  
• One of the paths that IBHS has identified towards a designation program is at the neighborhood scale or perhaps even clusters of neighborhoods.
  
• The ability to assess risk and evaluate a community at this geographic scale appears feasible.
  
• IBHS is focused on the following as the next steps towards developing the path toward a viable neighborhood/HOA-scale program:
  
  • Understanding what structure design level is effective and practical
  • Conducting additional post-fire analysis of the density of vegetative and connective fuels

Determining metrics for fuels assessment

MARCUS WINTER

Given all the challenges that Roy talks about regarding wildfires and taking into account climate change – is wildfire risk insurable?

MIKE QUIGLEY  

• Yes, but . . . .
• What I mean is that, in general, homes and businesses can be insured against the peril of wildfire but at the right price for the risk.  For this to happen, insurers need to first understand the risk and how it is changing over time and then, in a second step, they need to be able to charge an adequate rate for the risk.
• While it is difficult to predict where the next wildfire will start and how it will spread, much is known about what makes specific structures more, or less, vulnerable to destruction during a fire.  The same can be said about which communities are at a greater, or lesser, risk of major loss during wildfires. 
• One positive that has come from the increased wildfire losses observed since 2017 is the increased attention on wildfire science and its intersection with the built environment.  IBHS, for example, has been doing excellent work at identifying the methods and sources of structure ignition in wildfire and identifying clear steps to reduce that risk. 
• This focus has also spurred innovation regarding wildfire risk assessment, accumulation management and modeling across the insurance industry.
• So while the industry is getting better at understanding the evolving wildfire risk, the market still has some way to go in terms of rate adequacy.  This is why states like California are experiencing issues with insurance availability.

MARCUS WINTER

Thank you very much for sharing your insights Roy and Mike.  Here is my last question I ask all my guests. If you had a magic wand, what would you change about how we as an industry deal with wildfire risk?

ROY WRIGHT

• If I could change anything, I’d ensure we as an industry, made a lasting commitment to wildfire resilience.
  
• We can’t stop all these ignitions, but we can narrow the path of damage through very specific actions.
• It’s in how we manage the fuel loads in the broader ecosystem, the collective actions that happen at a community scale and then ensuring the parcels are prepared.
• I’d change it so that homeowners have roofs that won’t ignite and have the right building features and that we as an industry maintain a laser focus on defensible space, particularly those elements 5 feet closest to the home.
• The research tells us we can build homes less likely to be lost to wildfire.
  
• It means leaning into the science-backed solutions that come not just from IBHS, but from others who are committed to wildfire resilience.

MIKE QUIGLEY

• If I could change anything it would be related to the broad scale education of homeowners, business owners, land developers, and legislators regarding the peril of wildfire such that the risk is better understood and that proper risk mitigation was commonplace.
• Munich Re cannot drive industry initiatives like this from the back of the insurance value chain. We need government, trade organizations, primary carriers, homeowners and  businesses to lean in and help drive the change needed at the ground-level. 

MARCUS WINTER

Thank you both for joining me today.  It is good to know we are all on the same page as to how devastating wildfires can be and that current mitigation efforts must be adhered to in order to address this risk. As a reinsurer, it is critical we act responsibly today to ensure a resilient tomorrow. We must continue to price wildfire risk adequately, support mitigation measures and continue to develop innovative solutions to address wildfire risk.

ROY WRIGHT

Thank you for having me.

MIKE QUIGLEY

Thanks as well.

MARCUS WINTER

Stay tuned for our next episode of Nothing Assumed. Bye for now and see you next time on Nothing Assumed where we will address both short term and long-tail casualty claim trends. Auf Wiedersehen! Bis zum nachsten Mal.