CLIMATE CABLE | A small team of engineers in a cavernous laboratory in South Carolina spends their days setting buildings, fences, and bushes on fire and studying what happens next.
The investigation is aimed at the American insurance industry, which has suffered historic losses over the past decade in fires that have devastated entire communities.
In response, the industry has turned to scientists to investigate how wildfires spread in urban areas, a field of study that has become more important as climate change fuels larger, more destructive wildfires.
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“The impact it’s having on our communities is like we’ve never seen in decades,” said Anne Cope, who leads the engineering team at the Insurance Institute for Business and Home Safety, a nonprofit backed by the industry. “We have to put an end to it.”
A series of factors have complicated that work. Among them: Wildfires have recently become a major issue for the industry, meaning both the science and data surrounding their impact on communities are less advanced compared to other disasters, such as hurricanes.
Large wildfires can also be more complex to model, in part because fires, unlike hurricanes or earthquakes, are often started by humans and can also be extinguished by humans.
In response, the industry has increased investment in disaster modeling and building scientific research to keep pace with the growing threat.
The ultimate goal: account for risk with greater confidence; help owners minimize it; and stabilize insurance markets reeling amid inflation, a changing regulatory environment, rising reinsurance costs and climate disasters.
“It’s a very volatile time right now for companies that are trying to understand, model and price wildfire-related risk,” said Karen Collins, vice president of property and environment at the American Property and Casualty Insurance Association. (APCIA). ), an industry trade group.
Responding to that reality “is this really huge effort that’s going on at both the state and federal levels,” Collins added.
A “dramatic change in losses”
Wildfires have burned American forests and grasslands throughout history. But it wasn’t until the last decade that fires began to more regularly destroy hundreds of homes at a time, generating billions of dollars in insured losses in states like California and Hawaii.
“Hurricanes are so destructive that any on the East Coast had the threat of wiping out entire communities. But with the wildfires, that didn’t start happening right away,” said Carole Walker, executive director of the Rocky Mountain Insurance Information Association, an industry group.
Wildfire-related insured losses have skyrocketed over the past decade. Nine of the 10 costliest wildfires in U.S. history through 2022 occurred in 2017 or later, according to the Insurance Information Institute. And Swiss data shows that global insured losses between 2011 and 2020 from wildfires alone were more than five times higher than losses in the previous three decades.
Those losses are largely due to fires like Colorado’s Marshall Fire in 2021, which destroyed more than 1,000 structures and accounted for at least $2 billion in insured losses.
Before such events began to occur more frequently, insurers didn’t have to pay much attention to the issue “because the number of fires occurring and the likelihood of them” destroying neighborhoods were relatively small, said Michael Young, vice president of product management model at Moody’s RMS.
The “dramatic shift in losses” over the past decade, Young added, has forced the industry to consider wildfires as a “catastrophe hazard” for the first time and address them accordingly.
Doing so has involved turning to catastrophic risk modeling firms like Moody’s RMS to run simulations of hypothetical future wildfires that provide information about how a given wildfire would affect a particular type of neighborhood and what financial losses would result.
This is different from traditional “actuarial accounting,” which uses past disasters and the claims they generate to predict future risks. Young said catastrophe models, which incorporate an extensive data set on wildfires, buildings and current economic conditions, can help insurers better account for wildfires when making underwriting and pricing decisions in risk areas.
For years, California has prohibited insurers from using such models for transparency reasons. The state plans to reverse that rule soon given the role “cat models” can play in increasing insurer confidence around pricing wildfire risk.
“Reliance on those models is taking on a new life, or a different life, than in the past,” Michael Conway, who serves as Colorado’s insurance commissioner, said in an interview.
While the models are important, Conway added, regulators lack transparency about how they work, what types of information they represent and how often they are updated. He said that makes it difficult to know exactly how insurers make underwriting and pricing decisions, an issue Conway said could require legislation in the future. Oregon, for its part, is already moving in that direction.
The industry has also invested in research to better understand how fire jumps from wildlands to urban neighborhoods, as well as how megafires can be prevented.
IBHS, the South Carolina-based group, is the industry’s primary source of that information. The organization has a team of three researchers, led by Cope, who carry out projects related to forest fires.
Just one example: The research focused on attics and ventilated crawl spaces, which are intended to ensure air flow throughout the house, but which can also trap embers during a fire and “burn the house from the inside out,” Cope said. That research has involved testing different types of vents to see which ones prevent that outcome.
The project contributed to the 2022 publication of a standard that provides homeowners with specific steps they can take to mitigate their risk and, at least in theory, increase their insurability. Meanwhile, the IBHS standard focused on hail and wind has been around for more than a decade.
“We’re pushing that standard to more states and trying to build momentum and investment to take steps to get it done,” said APCIA’s Collins, who said the standard was first implemented in California.
“But it will take some effort and some dollar investment,” he added. “That’s the hurdle we’re trying to overcome.”
Humans are a big X factor
Catastrophe models and scientific research have evolved rapidly and are already helping insurers better factor both wildfire risk and on-the-ground efforts to mitigate it into their underwriting and pricing decisions, experts say. of the industry.
But they don’t give the industry all the information it needs to understand how these fires happen, how they can be prevented, and what both mean for the insurability of a particular home.
“I think we are definitely on the right path. But I wouldn’t say the industry has this completely figured out,” said Roger Grenier, senior vice president at Verisk, another catastrophe modeling firm.
That is the case for multiple reasons. While there is a long history of research on how fires start and move through wildlands, less time and attention has been devoted to modeling fires as they move from forests to neighborhoods, Grenier said.
The same goes for the science on what happens when different types of buildings are exposed to embers or radiant heat. Experiments by IBHS and other groups have moved the needle in that regard by showing that wildfire mitigation, when done right, can dramatically reduce homeowners’ risk, sometimes by as much as 50 percent.
But there is still some uncertainty among insurers about how to quantify the specific risk reduction that results from certain mitigation measures and how to translate that information into decisions about where to offer insurance and how to price it.
The industry says this is partly because insurers lack enough historical data from real-world fires that would provide a better idea of how effective certain mitigation measures really are.
“We know from scientific experimentation and post-event (analysis) that when things are done very well, the house doesn’t burn down,” Cope said. “How much does one thing contribute compared to the other? “It’s hard to know, both due to lack of experience and whether things burned completely or not.”
Lack of data is not the only factor complicating wildfire risk pricing (and risk mitigation). For starters, humans have a big influence on wildfire behavior, as they can start fires, put them out, and make buildings more or less resilient. That makes it more difficult to model fire because it requires modeling human behavior.
The nuances of wildfire mitigation itself are also important. While removing vegetation or wooden fences around a home are steps in the right direction, homeowners should make a number of changes to significantly reduce their risk, some of which should be maintained over time.
And then there’s the reality that significantly reducing wildfire risk doesn’t just depend on what one landowner does: it depends on the actions of each landowner in a given area.
“You have to do it at home, your neighbors have to do it. And by the way, vegetation grows back, so it has to be recurring as well,” APCIA’s Collins said. “There is a uniqueness there that is different from any other danger right now.”
Collins was among those who said the industry is working to address the problem so companies can do business more confidently in fire-prone areas and incentivize property owners to do everything they can to reduce the risk.
That could mean offering customers discounts on their premiums to reduce their risk at the property and community-wide level. In 2022, California became the first state to require such discounts. Insurance companies have already submitted those discounts for review, but most have not yet been approved by the state.
“Companies support risk-based pricing. And if you have a higher risk, there will usually be a corresponding higher cost. But if you reduce your risk, you will generally see your rates go down,” Collins said.
But that won’t happen overnight.
“It may take time as we have more data and more confidence in what the value of that discount should be,” he added.
Reprinted from E&E News with permission of POLITICO, LLC. Copyright 2023. E&E News provides essential news for energy and environmental professionals.