Wildfire risk remains an industry worry despite lower losses in 2023

In terms of perils worrying the industry, losses from wildfires seems to have been usurped by severe convective storms in 2024—so bad have the losses been from that exposure of late. But the data around wildfire losses shows a worrying pattern, which remains a big challenge for the re/insurance industry to address.

According to data from Aon, North America has now experienced at least one +$1 billion wildfire loss event in eight of the last 10 years. Prior to that, this magnitude of loss occurred in only five out of the previous 50 years, according to a September 19 Aon report titled “Wildfire Risk Fuels New Challenges for US Communities”.

Part of the reason the peril dropped down the agenda of the industry is perhaps that 2023 wasn’t too bad for insurers—in comparison to some very bad previous years. Some 2.6 million acres burned in 2023 compared to the decadal annual average of 7 million acres. That said, 2023 was the deadliest year in the last century, with the Lahaina fire in Hawaii causing over 100 deaths.

According to the Aon report, the rise in wildfire severity and size seen in recent years in the western US is directly linked to climate change, with increases in fuel aridity (the drying out of trees and other flammable ecosystems) driving exponential increases in burn area. 

A warming climate increases the atmosphere’s demand for water. This, coupled with changing rainfall patterns, contributes to drier and more flammable fuels, creating more favourable underlying conditions for ignition and spread.

“Several recent wildfires have caught the insurance industry off-guard.”

It notes that wildfire risk is especially high when dry fuels are combined with strong winds, spreading flames rapidly and making the fire difficult to control. The Camp (2018), Marshall (2021), and Lahaina (2023) fires were all influenced by very strong winds, which spread the fires from wildland sources into suburban communities, where they spread from structure to structure.

Addressing the challenge

The industry is investing in getting to grips with this challenge. In collaboration with UCLA and UC Merced, Aon has produced high resolution climate data to integrate into its Climate Risk Monitor tool, helping to quantify how wildfire and other climate perils may change in the future. The Canadian Forest Fire Weather Index (FWI) is a useful metric to estimate the role of changing weather and climate conditions on potential fire danger. Many of the most costly and deadly events in recent US history have occurred under extreme FWI conditions.

Aon admits that, as much as there is an increased focus on wildfire risk within the insurance industry, uncertainty remains around its quantification. Several recent wildfires have caught the insurance industry off-guard, with a growing number of events happening in geographies traditionally considered lower risk. 

These include Lahaina and Gatlinburg (2015), and during periods outside the traditional wildfire season, such as Marshall. Prior to 2023, Hawaii had no wildfire events with notable insurance losses and, as a result, was out of scope for many hazard-scoring tools and catastrophe models.

“The industry needs to adapt its understanding of how risk differs at the regional level, especially in the US. This is a key focus for Aon as we incorporate the findings from our research collaborations with UCLA and UC Merced into our analytics tools such as Climate Risk Monitor and Impact Forecasting’s forthcoming wildfire model to help clients understand how climate change may impact the risk,” Megan Hart, global head of Analytics and Collaborations, Aon’s Climate Risk Advisory, said in the report.

There other considerations. While the direct damage affecting people and property driven by wildfire events is well documented, organisations are increasingly waking up to the risks posed by secondary impacts on their workforce and operations. 

These indirect effects—such as extended periods of wildfire smoke post-event—can pose business disruption risk for a range of industries. For example, last year’s events in Canada were responsible for a downturn in solar energy production and widespread disruption to flights in the US Northeast, Aon noted.

Secondary impacts also present significant health challenges. Tens of millions of people experienced the downstream effects of the Canadian wildfires as organisations grappled with how to address the health, wellbeing and financial challenges faced by their employees when heavy smoke created from the events travelled south, impacting several major US cities.

“Such occurrences raise key questions about how companies are expected to support their employees, specifically around flexible workplace policy, access to emergency medical supplies and home versus office resilience measures,” Aon noted.

For more news from the American Property Casualty Insurance Association (APCIA) click here.

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