United States (U.S.) Wildfires: The Tipping Point for Property and Casualty (P&C) Insurance

At the time of this blog’s publication, Guidewire customers are processing tens of thousands of insurance claims for the devastating wildfires in California, Oregon, and Washington.  The claims are not just for homes and businesses destroyed, but also for smoke contamination, contents damage, and living expenses due to evacuation orders. 

Statistics that describe these fires do not adequately express the horrors experienced by their victims. But the statistics are a good starting point to understand the magnitude of the situation. So, as of Friday, October 2, 2020, here they are:

Insured losses are likely to be significant. Moody’s Investors Service estimates that 2020 is already the third-highest year for California insured wildfire losses (after 2018 and 2017) at an estimated $4.8 billion. Including Oregon, Washington and other western states, Moody’s estimates insured losses in the five- to eight-billion-dollar range.

And with months of wildfire season left to go, A.M. Best believes that, based on the acreage and number of structures destroyed, 2020 has the potential to be at least as costly as 2017 (subscription required), which saw $13 billion of insured losses.

So where does the P&C industry go from here?

(CREDIT: ABC7 News)

2020 vision: a glimpse of the future

To answer this, we need to understand the long-term causes of the fires, which come down to three contributing factors: (1.) a changing climate with warmer temperatures and more extreme weather; (2.) a huge population increase in fire-prone areas; (3.) and a land management philosophy in the 20th century (since revised) favoring aggressive firefighting over vegetation thinning.  The combination of these factors has resulted in fires of savage proportions.

None of these contributing factors are likely to change soon, which means that severe wildfires are here to stay. As a result, communities must focus intensively on resilience and prevention strategies, and the P&C insurance industry must adapt to this new reality.

Underwriting in an uncertain world

Insurers have reacted to the past three fire seasons with a mix of raising rates, re-underwriting risk, and purchasing additional reinsurance. Exacerbating these challenges, regulatory and legislative actions have inflated claims values and prevented insurers from issuing non-renewals

Successfully writing homeowners coverage in the Western U.S. will require granular pricing, underwriting guidelines that incentivize safety (or penalize the opposite), and a significant embrace of data and analytics that provide insight on a home’s susceptibility to wildfire loss.

Luckily, in 2020 all of these things are possible.  Community fire planning has become very active in high-risk towns. Budgets for wildfire suppression and vegetation management are increasing steadily. And the science of wildfire catastrophe modelling is improving quickly.

Most promising is the usage of satellite and aircraft imagery in detecting the fire risk of individual homes. With a few mouse clicks, insurers can leverage artificial intelligence-enabled tools that consume high -resolution imagery to detect roof condition, yard debris, vegetation density, and even things as nuanced as ponding on a flat roof and tree overhang. (Full disclosure: Guidewire recently invested in Betterview, a terrific company that provides this kind of insight to many of our customers).

A familiar path

This isn’t the first time the industry has been confronted with a new, difficult peril. P&C insurance was forced to re-think its approach to managing hurricane risk in 1992 after Hurricane Andrew left dozens of insurers insolvent. Terrorism became an explicit new peril in 2001, giving rise to advanced blast modelling analytics and a robust international terrorism insurance market. And after tsunamis left hundreds of thousands dead in Indonesia (2004) and Japan (2011), the industry embraced computationally-intensive tsunami simulations.

Today it is time for the P&C industry to confront the challenge of wildfire. At Guidewire, we play a small and quiet part in enabling recovery and resilience in the wake of a catastrophic wildfire through the products and solutions we provide. In the insurtech space, there are dozens of imagery, data, and analytics solutions that enable insurers to respond to our changing climate with appropriate solutions. The industry can make use of these tools to better understand today’s wildfire risk – one that the former Governor of California has called “The New Abnormal.”

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