The Risks of Hazard

In the past, this blog has asked rhetorically “Why do insurers ignore wildfire?” It’s a peril that causes real losses (about $6B in the past 20 years in the USA alone), yet has data and analytics that can significantly improve residential and commercial underwriting for it. The readership metrics for Risks of Hazard reinforces the question: blogs about wildfire get opened less than any other subject we write about. Today, let’s answer that rhetorical question: Here is why insurers pay less attention to wildfire than they should.

Every summer, wildfire is high profile. The names of some recent fires are evocative: Rim, Sleepy Hollow, Waldo Canyon. This year the headlines are coming from the East: Pennsylvania has the Lehigh Valley Fire, and the late April NFS situation report lists fires in six eastern states. In Canada, the news is harrowing as Fort McMurray (pop. 80,000) is being evacuated as the city burns. Notoriety and media coverage is not the problem.

With wildfire season officially here, the Risks of Hazard is republishing the below post from last year. The question we asked in October remains valid – why do insures not do more with wildfire analytics when it’s one of the most robustly modeled cat perils?

Wildfire has been big news in 2015. The USA and Canada are both having epic years, as long-term droughts combine with hotter and drier-than-normal temperatures in much of the West burning more acres and buildings than ever. Yet, when I talk to carriers about risk analytics, wildfire seems like an ignored peril. Why?

Historically, wildfire has been underwritten (or excluded) based on proximity to trees. Historically, that was adequate, too. But over the past 20 years, as towns and suburbs have expanded into wildland, the exposure to losses has increased exponentially. This week, AM Best (mind the subscription-wall) is reporting on Guy Carpenter’s estimated losses for the Western US in 2015 and the figures are eye-catching: $1.75 billion.

Earlier this week, I wrote about Goldfish Underwriting and referred to this Brink article (thanks again to authors Carolyn Kousky and Erwann Michel-Kerjan) to describe how flood risk varies within NFIP A zones. The Brink article summarizes a study of NFIP claims over the past 35 years. At first I thought it would be a standard-issue, “NFIP-is-broken” article, but it is completely different from anything else I’ve read about NFIP losses, and the authors' four conclusions are each worth a look.

Last week, Property and Casualty 360 published a post by Sean Allen entitled 4 areas for the Insurance Industry to Modernize. The article is based on the consensus after the Xchanging London Market Conference last November, and it starts with:

Fair or not, many look at insurance as an outdated industry, lagging behind others of similar stature and scale when it comes to innovation.

Last week, I had the pleasure of meeting representatives from three Lloyd’s syndicates for the first time. It was an exciting time for me and my product (InsitePro™), because Lloyd’s is always a milestone for any new product serving insurance. The real beauty of the meetings, though, was that they were not in the City of London, but rather, in a small American prairie city.

The Lloyd’s market is an icon of insurance, with its vast history, its innovative approach to risk management, and its global reach. To many people, Lloyd’s of London IS insurance. I always thought, though, that my first meetings with a Lloyd’s syndicate would be in London at their famous headquarters. Nope.