Wildfire risk: insurers feeling the heat?

Recent dramatic footage of the wildfires blazing across Colorado will resonate with communities across the world.

The Waldo Canyon Fire, northwest of Colorado Springs in El Paso County, destroyed over 300 properties - making it the most destructive wildfire recorded in the state’s history. It came after a week of Texas wildfires in which insured losses from more than 180 outbreaks could reach $250 million.

But wildfires are a big problem in many countries – and there may be worse to come.

A recent report from climate scientists at the University of California, Berkeley, and at Texas Tech University says that climate change is disrupting wildfire risk around the world. The scientists say, “substantial and rapid shifts are projected for future fire activity across vast portions of the globe”.

The scientists found that by the end of the century, almost all of North America and most of Europe will see a jump in the frequency of wildfires, primarily because of increasing temperature trends, and that decreases in fire activity (due to increased rainfall) are less pronounced and concentrated primarily in a few tropical and subtropical places.

“There is a growing body of evidence that points to more frequent and severe wildfires as a result of climate change,” says Neil J. Smith, Manager of Emerging Risks & Research at Lloyd's. “A recent report from the Intergovernmental Panel on Climate Change found that drought, coupled with extreme heat and low humidity can increase the risk of wildfire.”

Smith says that underwriters who continue to rely on traditional risk assessment and pricing methods based on past experience - unaware of such climate-driven developments - could under-price the risk.

“The basic insurance business model is [that] you diversify by writing different, uncorrelated risks, which allows you to take the occasional big loss," says Smith.  "But it appears climate change is creating a correlation between large risks, for example causing more frequent and intense storms and wildfires. That could have big implications on insurers’ capital.”

At least eight Russian firefighters died during a wildfire in southern Siberia earlier in 2012. They were part of a team of firefighting parachutists flown in to tackle a massive blaze in the Russian republic of Tuva, which borders Mongolia.

At the same time, authorities in Greece were battling wildfires in several locations near the capital Athens. The biggest fire was reported to be near the town of Keratea, 50 km (30 miles) south of Athens. 

In addition, earlier this year, multiple forest fires ravaged large areas of central and southern Chile.

According to Smith, heightened wildfire risk is an important aspect of climate change that insurers and insurance buyers in exposed areas need to adapt to: “It is worrying that the areas at increased risk are often areas of population growth and economic development.”

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