A confluence of excessive heat and lack of precipitation has led to a dangerous wildfire situation in the western United States. As of late September, 75 percent of the western region is in a state of moderate to exceptional drought. The drought, combined with high winds and lightning activity, precipitated the ignition and rapid spread of over 70 large fires in California, Colorado, Oregon, Washington, Idaho and surrounding states. In California, fires destroyed approximately 6,500 structures, while the Oregon fires devastated five small towns. The ability to understand the underlying risk and to model potential exposures will be key to risk management and underwriting decisions moving forward, according to Alexander Van Dijk, President U.S. Branches, and Kimberly Roberts, North America Peril Advisory, Guy Carpenter.
Weather Patterns – What is Driving the Increased Frequency?
Observational data indicates that 2020 thus far is the second warmest year on record after 2016, with record-breaking temperatures in northern latitudes 3-5 degrees above average. Warm air can hold more water vapor, increasing temperatures that in turn influence catastrophe frequency and severity. In moist environments, such as the tropical Atlantic Ocean, there is an increased likelihood of extreme precipitation, as observed in the occurrences of recent hurricanes Harvey, Florence and Laura. However, in a dry environment, air attracts water vapor, and thus acts almost like a vacuum sucking moisture out of vegetation. Dry vegetation becomes ready fuel for wildfire.
The average global land and ocean surface temperature for the first half of 2020 was nearly 2 degrees F above the 20th century average. (Source: NOAA)
A pattern has emerged related to the joint concept of greater precipitation in winter months coupled with greater evaporation in summer months, both driven by a warming climate. A wet winter allows grasses to grow, which dry out during excessively hot summers, and become receptive fuel for fire, especially during offshore wind events like the Santa Ana Winds.
The 2017 and 2018 wildfire seasons are examples of escalating property losses from wildfire associated with average to wet winters followed by record-breaking heat during the summer months, which then extend into warm and dry autumn wind seasons. While climate change amplifies processes leading to wildfire, increasing exposure and population vulnerability are the root cause of escalating property losses. In 2014, Drs. Walker Ashley (NIU) and Stephen Strader (Villanova University) coined the term “Expanding Bull’s Eye Effect.” Essentially “Targets”— humans and their possessions -- enlarge as populations grow and spread. In the case of wildfire, urban areas grow and spread on their fringes, expanding the Wildland Urban Interface (WUI).
These areas are often desirable aesthetically, but also risky, as the built environment encroaches on wildlands and vegetation conducive to burning. Significant building into wildlands compounds opportunity for extensive loss scenarios, where the wildland fire can transition into the built environment producing urban conflagration.
Much like an archer shooting their arrows (wildfire) at a target (development), as the target grows in size the odds of the archer hitting a bull’s eye (disaster) is increased. Ashley et al. 2014; Strader and Ashley 2015
Quantifying the Risk
In a proactive response to consecutive years of record wildfire insured losses, Guy Carpenter has been working to develop tools to help clients quantify, manage and better understand their wildfire risk.
This includes a holistic suite of tools and services based on current developments in wildfire science – the GC Wildfire Diagnostic (SM). Guy Carpenter has created this solution suite by building on our deep understanding of the wildfire hazard and resiliency. It has been built thorough validation, verification and testing of wildfire catastrophe models, including the ability to modify results to account for scenario-based issues such as climate change and mitigation measures, and through our leading position at the forefront of risk quantification and analysis. At the core of the new GC Wildfire Diagnostic are the GC Wildfire Risk Score and GC Urban Conflagration Index.
In 2020, the existing analytical suite was enhanced with these tools facilitating risk quantification and comparisons across and within states, counties and individual communities. The GC Wildfire Risk Score assesses risk on a site-by-site basis, capturing climate, meteorological and landscape data across multiple spatial scales summarized in a simple, single metric. Covering the lower 48 states at a 30-meter resolution, the Wildfire Risk Score was carefully calibrated and validated by Guy Carpenter scientists to ensure that risk classes are appropriately differentiated and provide superior performance when validated against observed events.
GC Wildfire Risk Score. In this example, risk scores would be highest in the purple and red areas and lower in the yellow and green areas.
The GC Urban Conflagration Index, available in the western United States and Florida, identifies areas where the phenomenon of urban conflagration is more likely. Urban conflagration – wildfire entering a developed area and spreading from structure to structure, is of particular concern to carriers due to the highly correlated and often total resulting losses. The GC Urban Conflagration Index is also available at 30-meter resolution, which assists in identifying communities with elevated urban conflagration risk.
GC Urban Conflagration Index. In this example, risks located in the green areas have less urban conflagration risk than those located in orange and red areas.
The GC Wildfire Risk Score and Urban Conflagration Index form the backbone of a series of products and analyses that operate from the policy level to the portfolio and enterprise level. The backbone of Guy Carpenter’s offerings is the ability to improve underwriting decisions through effective and validated scoring mechanisms. At the portfolio level, the GC Wildfire Diagnostic quantifies loss potential and aides in the management of wildfire aggregate exposures. Additional wildfire services include portfolio optimization, custom growth strategies in wildfire vulnerable areas, and dedicated expertise when a live event is occurring.
Moving Forward
As recent history and ongoing weather patterns have shown, wildfire is a peril that demands improved modeling efforts to quantify and manage risk. The GC Wildfire Diagnostic leverages the latest in wildfire science, allowing insurers to effectively quantify and manage their exposure to wildfire risk, which is of growing concern to all property insurers in California and beyond. It allows insurers to accelerate responsible growth without fear of unintended impacts to profitability. The GC Wildfire Diagnostic supports better risk management decisions, enhanced profitability and opportunities for an improved competitive position in a landscape of increasing wildfire risk.