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Underwriting Wildfire Takes Extra Care

This is part 2 in a series. You can find part 1 published here.

An increasingly volatile recipe of climate change and urbanization means that the past is no longer representative of the future when it comes to wildfire risk. Insurers can’t rely on previous wildfire seasons or events to inform future strategy. Just as every wildfire is unique, there simply is no one-size-fits-all approach to underwriting this risk. If you’re going to write wildfire risk in the U.S., and particularly in the West, then not only must you concede to assuming some level of risk but you must implement a more strategic approach. Savvy insurers know this, and that’s why they’re reaching out to solutions providers, brokers and data companies to help them develop a new game plan for a risk that’s 90% caused by humans and 100% variable. 

Back-to-back years of catastrophic wildfires raise the question: When will wildfires cease to be historic on an annual basis? According to GenRe, the severity of wildfire events is likely to continue. Its research reveals that it’s not so much the frequency of events (with the number of wildfires being fairly consistent since the 1980s), but the size of the event, with megafires an emerging trend: 

“Thinking of 2017 and 2018 as ‘1 in 20’ events may seem extreme; thinking of them as ‘1 in 5’ is almost too frightening to accept. No one knows the right answer, but we believe that long-term historical answers are unlikely to be the right ones.” — Ira Kaplan, GenRe 

So, how can insurers confidently underwrite wildfire risk when the cards seem stacked against them? Answer: By implementing a more innovative and strategic underwriting approach. 

My role as director of data products for Insurity’s SpatialKey solutions focuses on helping insurers explore new avenues to reduce wildfire risk and identify opportunities by applying smarter data and analytics. Our data partners continue to push the envelope by developing savvier ways to analyze risk by examining past behavior. For example, California’s megafires, including Tubbs, Thomas and of course the Camp Fire, which devasted the town of Paradise, have brought to light a few strategic considerations:

A single score is not the be-all-end-all

“It’s all about finding good risks in bad areas,” according to Clark Woodward, CEO and founder of RedZone, an innovative wildfire modeling company. “Wildfire is difficult to model because there are so many factors such as urbanization, a rapidly changing climate, increasingly intense fire behavior and the unpredictability of where fires ignite. This means insurers need to move away from a single score, which does not accurately encompass the complexities of fire risk. You’re going to be much more likely to be surprised if you are relying on a single number.”  

We’re seeing more of our partners, such as RedZone and Willis Re, bring data to market that tells a more complete story. For example, RedZone’s “correlated risk zones” data supports both underwriting and portfolio-level analysis by enabling risk analysts to identify communities or regions that may be many miles apart but could be affected by the same event. These regions, statistically, burn together even though they are separated by natural breaks (i.e. highways, ridgetops, rivers). The zones help insurers identify risk based on fire behavior and characteristics.

Reinsurance broker Willis Re is applying an innovative wildfire risk score underwriting methodology that also helps clients understand areas that are driving up probable maximum losses (PML) to help diversify portfolios and drive reinsurance costs down. This solution enables carrier clients to make more informed rating decisions while considering the hazard level of the new locations and the associated impact. As Vaughn Jensen, executive vice president at Willis Re, explains, “California’s recent wildfires illuminated that many carriers do not have a good handle on their wildfire risk, in no small part because existing industry models do not accurately represent the hazard.”

See also: Wildfire Season Off to Perilous Start

More data points need to be taken into consideration 

Layering HazardHub data, such as distance-to-fire-station and distance-to-hydrant, with another wildfire model can provide insurers with a more comprehensive understanding of wildfire risk, especially when visualized within a geospatial analytics solution that provides contextualization of the surrounding landscape. For example, visualizing wildfire risk in combination with data points that answer the following questions is critical to understanding the big picture: 

  • What’s the proximity to the nearest fire hydrant?
  • What’s the proximity to the nearest fire station? 
  • What’s the proximity/access to the nearest road(s)? 
  • Is there evidence of active tree clearing and mitigation efforts surrounding the structure(s)? 
  • What’s the loss type (i.e. direct, embers, smoke) and intensity?
  • What’s the construction type and year built (likeliness to burn)?

The above underwriting report includes critical fire station data from HazardHub along with the relative risk score of the peril itself from Willis Re. This combination of data points helps to contextualize and price risk in a single view.

Bringing it all together for a more strategic and informed view of wildfire risk

Multiple data points, and even multiple models, should be used collectively for more informed and strategic wildfire risk assessment at the point of underwriting. It’s imperative that wildfire risk isn’t assessed with a single model or single score, which is why I’m dedicated to facilitating a more open ecosystem where our P&C clients have access to multiple sources of expert data.

Equally important to leveraging new data sources is the ability to readily access them and use them to make informed underwriting decisions based on your risk appetite and in the context of your existing portfolio data. Making data easily accessible to decision-makers, along with enhanced analytics, will be the defining difference between companies that succeed with wildfire risk and those that fail.

Helping Insurers Get a Handle on Wildfire

“California is the lab for managing exposure to wildfire risk,” according to Lynn McChristian, a professor of risk management at Florida State University. If carriers and reinsurers can make it there, they can make it anywhere.

The past several years have seen a steep increase in the severity of wildfires, with the 2017 and 2018 seasons causing $24 billion in insured losses in California alone. Rates are climbing there, and coverage is dropping—there is clearly insufficient wildfire coverage to meet market demand, especially in high-risk, wildland-urbane interface (WUI) communities. 

These historic losses, combined with insufficient solutions for managing wildfire risk, mean insurers are trying to get a handle on their wildfire portfolio accumulations and gather perspective on relative risk. Simply put, the old way of doing things has been proven not to work—and insurers are demanding better. 

The flaw with historical wildfire risk management: Fires don’t burn in a circle

The California wildfires illuminated that many companies do not have clear best practices around managing wildfire risk, primarily because it has often been considered part of wider policy terms.

One solution is to limit accumulations between highly correlated areas of wildfire risk. Historically, insurers have looked at their concentrations of wildfire risk at the county level, along with using ring accumulations as a tool to assess risk. But fires don’t burn in a circle, and they don’t know postal code boundaries. Now, RedZone, a wildfire modeling company, has used millions of wildfire simulations to identify burn patterns across the landscape to create areas called “correlated risk zones.”

See also: Parametric Solution for Wildfire Risk

These zones are essentially regions that look completely separate but, statistically, burn together. They provide a logical and credible alternative by which to manage portfolio risk accumulations, alongside traditional loss modeling techniques. A more consistent approach to managing capacity can also improve risk-based pricing.

Solving a portfolio-scale problem requires changing the way we think

“Models have focused on risk at specific locations, but this is a portfolio-scale problem,” RedZone CEO and founder Clark Woodward says. 

The above screenshots show RedZone’s models for use in portfolio-level analysis. On the left is RedZone’s burn probability layer. When combined with the image on the right, which is RedZone’s hazard control zones, you can develop a firmer understanding of portfolio composition when it comes to accumulations and likeliness to burn. 

Accumulation analysis involves defining zones of correlated risk—where properties are likely to be damaged by the same event in the same year—and estimating the probable maximum loss (PML) within each zone. By evaluating accumulated wildfire risk, insurers can assess where additional properties may be insured with minimal increase in exposure to extreme losses. 

Reinsurance broker Willis Re has also brought to market a new methodology for wildfire underwriting and customer-specific portfolios. By helping carriers understand not only individual risk selection but geographic areas that are driving up their PMLs, Willis Re can, in turn, help them diversify their portfolios and drive down reinsurance costs.

Practical innovation that can be deployed now  

It’s taken a beat—and a harsh reality check—but better wildfire risk management strategies are now coming to fruition. Providers like RedZone, Willis Re and Insurity are working collaboratively to create solutions, like the correlated areas of risk discussed here, that provide better, more logical ways of managing wildfire accumulations.

This technology can be quickly deployed and implemented alongside traditional risk management strategies. This allows insurers to avoid disruption while employing a consistent approach to managing capacity across both underwriting and portfolio management and, ultimately, better serve and protect insureds against wildfire risk.