'Practical innovation' is helping insurers manage wildfire risk
Insurers are actively trying to get a handle on their wildfire portfolio accumulations and gather perspective on relative risk.
Florida State University Risk Management Professor Lynn McChristian says, “California is the lab for managing exposure to wildfire risk.”
In other words, if carriers and reinsurers can make it there, they can make it anywhere.
The past several years have seen a steep increase in the severity of wildfire events, with an estimated $12 billion in insured losses in California alone in 2018, and nearly that same amount in 2017.
These historic losses combined with insufficient solutions for managing wildfire risk mean insurers are actively trying to get a handle on their wildfire portfolio accumulations and gather perspective on relative risk. Simply put: The old way of doing things has been proven not to work — and insurers are demanding better.
The view from within
In the London market, where I work, the general sentiment is that carriers are in need of more workable solutions for managing wildfire risk. Back-to-back years of heavy wildfire claims have hurt established players. Now the onus is on solutions providers to devise better, more innovative data and analytics solutions so insurers can engage new strategies for managing this seemingly unmanageable risk.
Both public and private entities depend on the insurance community to rise to the occasion. To that end, there’s a need and a gap in the market for affordable, adequate wildfire coverage.
Here’s how SpatialKey CEO and Founder Tom Link characterizes the challenge: “We’ve seen insurers struggle over the past few years with how to successfully manage this risk. Sure, in some places, non-renewals make sense. In others, however, the answer might be to dig deeper and look for ways to employ some lateral thinking… We’re seeing strong demand among insurers for data and analytic solutions that can go toe-to-toe with ever-increasing wildfire risk.”
Problematic historical data
The California wildfires illuminated that many companies do not have clear best practices around managing wildfire risk, primarily because it has often been considered part of wider policy terms. As such, there is a much-needed focus on solutions that will help insurers write quality risks.
One such solution is to limit accumulations between highly correlated areas of wildfire risk. Historically, insurers have looked at their concentrations of wildfire risk at the county level, along with using ring accumulations as a tool to assess risk.
But, there are flaws with these strategies: Fires don’t burn in a circle. And they don’t know postal code boundaries. In response, RedZone, a wildfire modeling company with offices in California and Colorado, has used millions of wildfire simulations to identify burn patterns across the landscape to create areas called Correlated Risk Zones.
Correlated Risk Zones are essentially regions that look completely separate but statistically burn together. They provide a logical and credible alternative for managing portfolio risk accumulations alongside traditional loss modeling techniques. Based on these Correlated Risk Zones, a more consistent approach to managing capacity can be used across both underwriting and portfolio management to differentiate and achieve better risk-based pricing.
The portfolio-scale problem
“Our goal is to provide the market with a unit of aggregation where they can see risk at the neighborhood or regional level,” explains RedZone CEO and Founder Clark Woodward.
“Models have focused on risk at specific locations, but this is a portfolio-scale problem,” he continues. “Our data uses geographic risk to define correlated risk to then calculate aggregate risk. It makes sense that these aggregated risks can be applied to drive informed decisions and better align your portfolio to your business strategy.”
The above screenshots show RedZone’s new models for use in portfolio-level analysis. On the left is RedZone’s burn probability layer. When combined with the image on the right, which is RedZone’s hazard control zones, you can develop a firmer understanding of portfolio composition when it comes to accumulations and likeliness to burn.
Accumulation analysis involves defining zones of correlated risk — where properties are likely to be damaged by the same hazard event in the same year — and estimating the probable maximum loss (PML) within each zone. Insuring properties that lie within higher-risk zones exposes an insurer to a greater potential for large losses than insuring properties in lower-risk zones. By evaluating accumulated wildfire risk, insurers can assess where additional properties may be insured with minimal increase in exposure to extreme losses.
Willis Re also recently brought a solution to market that applies a new methodology to wildfire underwriting and customer-specific portfolios. By helping carriers understand not only individual risks selection but also geographic areas that are driving up their PMLs, Willis Re can, in turn, help clients diversify their portfolios and drive down reinsurance costs.
“We’re helping our clients make more informed decisions while considering the hazard level of the new locations and the associated impact to their portfolio,” says Willis Re Executive Vice President Vaughn Jensen. “This provides a combined framework for our clients to achieve meaningful underwriting risk selection and portfolio improvements with the least amount of disruption.”
Take a beat, come back stronger
It took a harsh reality check, but better wildfire risk management strategies are now coming to fruition. Providers like RedZone, Willis Re and SpatialKey are working collaboratively to create solutions, like the correlated areas of risk discussed here, that provide better, more logical ways of managing wildfire accumulations.
This is “practical innovation” that can be quickly deployed and implemented alongside traditional risk management strategies, which allows insurers to avoid disruption while employing a consistent approach to managing capacity across both underwriting and portfolio management.
Ultimately, the result is better service and protection against wildfire risk for insureds.
Louise Braybrooke (louise.braybrooke@spatialkey.com) is the director of Client Services at SpatialKey, a data enrichment and geospatial analytics provider. Louise holds a degree in Geography and Environment Studies and has extensive experience and expertise in the global insurance and reinsurance vertical with a bias towards Europe and Asia. Prior to SpatialKey, Louise worked at RMS for over 12 years.
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