Will Wildfires Affect The Insurance Industry?

Wildfires have always been a part of the natural cycle, but their frequency and ferocity have made them a growing problem over the last few years. This year’s wildfire season has been particularly devastating, with California still in the midst of the deadliest fire in its history. Since these wildfires show no signs of slowing down, many are beginning to wonder how this will affect the insurance industry. While it is impossible to know how the industry will react for certain, we have some ideas.

In short, the industry will adapt. Traditionally, insurers look at historical data to identify trends and accurately assess risk. Since these devastating wildfire seasons are a relatively new phenomenon, that approach is going to have to change. While the industry needs to remain data driven, the data they look at needs to be more recent, and with more of an eye towards future trends.

A.M. Best issued a briefing addressing the new reality of wildfires in California. According to the brief “Urbanization and growing population density in heavily wooded areas, as well as hotter, drier conditions resulting from rising temperatures and declining precipitation, are contributing to wildfires becoming an increasingly frequent peril for insurers and citizens of California…As this year has progressed, so have the wildfires that continue to engulf numerous areas of the state.”.

Insurers will likely start to treat wildfires more like other natural disasters. The insurance industry assesses risk for things like earthquakes, floods and hurricanes by using computer simulations to predict a variety of climate scenarios. This modern approach will allow insurers to more accurately predict wildfire danger, and adjust premiums appropriately.

The current wildfires burning in California alone will account for billions of dollars worth of insured damages before they are done, and the season is far from over. According to the Insurance Journal, “The Camp Fire in Butte County had burned 125,000 acres and was only 30 percent contained as of Tuesday afternoon. The fire resulted in 42 deaths, and had destroyed 6,522 residences and 260 commercial properties.”.

The insurance industry has adapted to change, and will have to do so again. Experts agree, this trend of intense fire seasons will only get worse as time goes on. California is dealing with this new reality now, more states will follow.

Sources:
https://www.insurancejournal.com/news/west/2018/11/13/507414.htm

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