Moving Towards Danger – Economic Growth In High Hazard Areas

As populations and economic activity gravitate towards higher risk geographies, TransRe’s Maryam Haji seeks some lessons from the recent wildfire seasons.

From the beginning of time, people have chosen to live in dangerous places – at the mouths of rivers (flood-plains), under the shadow of volcanoes (Pompeii), along fault lines and in the frequent paths of hurricanes, typhoons and tsunamis.

The recent demographic trends in the U.S confirm that same tendency. If we overlap economic and metropolitan growth (California, Colorado, Arizona, Texas, Florida) with natural catastrophe exposures (earthquake, flood/hail, drought, hurricanes) then we see a build up of economic value in more exposed locations.

California’s 2017 wildfires caught everyone by surprise. Because industry models didn’t accurately reflect circumstances on the ground, we went back to the data and constructed our own view of the risk.. We expect changing climate conditions and changing demographic mix to increase future losses from wildfires. We are revisiting other hazards to apply the same lesson in other areas.

New Insights

When we dug into the details of California’s wildfire losses, we found previous calculations failed to reflect the new reality:

  • Industry models only included the first row of houses at the Wildland Urban Interface, but 2017 showed embers from the first row could (and did) spread deeper.
  • Once we assumed California’s wildfires were a summer phenomenon, but 2017 and 2018 extended into the Fall, when seasonal winds accelerated the spread of the fires.
  • Industry models underestimated the population shift towards WUIs, as Californians moved from the expensive urban areas to afford better housing. Those two million new homes at the Wildlife Urban Interface were not fully included before 2017.

New Normal?

We expect elevated loss levels compared to prior experience. With regard to wildfires, California’s average temperature remains consistently above historical averages. Elevated temperatures bring extended droughts, which then kill vegetation (brush and trees) and increase the fuel load.. Extended dry seasons now frequently overlap with seasonal winds to fan the flames. Westward winds will push the fire through exposed areas faster, overwhelming defenses more often. The expansion of construction on the Wildlife Urban Interface affects many western states (Oregon, Colorado, Nevada), not just California.

New Demography

People will continue to move to improve their quality of life. Public services will continue to evolve to serve those communities. In the case of wildfires, firefighters, forestry managers, property developers as well as state and federal regulators are all studying the implications of these changes. That study, to deliver improved, coordinated responses to the hazard, has taken on a new urgency.

Implications For (Re)insurer Support

Our industry exists to help society understand and quantify the risks, and to manage their preparation and recovery. We ‘harden’ assets with research, advice and price ‘nudges’, and our research informs our support.

The 2017 and 2018 wildfire claims ran higher and faster than expected. With help from attorneys, regulators and financial analysts, we co-hosted a webinar to explore the drivers of these claim trends. We discussed the changing regulatory environment and the pressure to make early claims payments ‘on account’. We looked at the implications for PG&E’s liability exposure of the corporate restructuring. We covered the sale of recovery rights to third parties and the recoverability of different damage elements (e.g additional living expenses, attorney fees). We targeted the discussion at insurers and brokers, so we naturally talked about how best to work with your TransRe underwriting and claims teams to maximize your recovery!

In Conclusion

Insurance prices are based on frequency and severity. The frequency of wildfires remains unpredictable, but the severity trend is clear - more people are building ever more expensive properties in fire-exposed areas and that will result in more severe losses per fire. This is true for other hazards in other places, too. We have been warned.

Maryam works in TransRe’s Catastrophe Modeling Team and is based in New York. If you’d like to discuss the team’s research further, you can call Maryam on 1-212-365-2200 or email her mhaji@transre.com.


Created with images by skeeze - "forest fire hose water" • Filippos Sdralias - "untitled image" • Michael Held - "untitled image" • Gerson Repreza - "untitled image" • skeeze - "sunset landscape trees"

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