Homes at risk of wildfire in the U.S. amount to a staggering reconstruction value of beyond $237 billion, demonstrating the potential exposure levels and also the opportunity for the insurance, reinsurance and capital markets.
According to international property information, analytics and data-enabled services provider, CoreLogic in its recently published annual wildfire report, ‘Wildfire Hazard Risk Report – Residential Wildfire Exposure Estimates for the Western United States – 2015,’ almost 900,000 single-family homes are situated in an area at “High” or “Very High” risk of wildfire exposure.
CoreLogic’s report looks at the historic trends of wildfires across the U.S., highlighting that despite a reconstruction value of some $237 billion, 2014 wildfire activity was actually one of the quietist for some time.
After 2013, last year was the second lowest period in the last two decades for wildfire activity, as 63,345 wildfires burned down 3,587,561 acres of land. This was also the second lowest acreage burned total in the last 10 years, according to CoreLogic’s findings.
“The 2014 wildfire year was characterised by several inconsistencies. While it did continue the recent downward trend in both number of wildfires and acreage burned, it also was a year that experienced a large increase in the number of early wildfires in California,” explained CoreLogic.
An intensified drought season in 2013 is thought to have contributed to California’s unusually active January wildfire season. Showing how one natural risk can influence and shape another’s coming season.
The report notes that a possible reason for a decrease in aggregate burned acreage and fire occurrences could be due to “more intensive response to small fires and ignitions,” ensuring that a greater number of smaller fires fail to become a wildfire than in previous years.
However, this approach to managing the hazard does mean an increase in the use of agencies, which ultimately means greater response and wildfire prevention expenses.
The study stresses that despite low wildfire seasons for the last two years, this should not be considered a fundamental change moving forward; “As history indicates, wildfire events tend to be cyclical by nature.”
Also, as residential growth in the Western states of the U.S. continues the number of homes exposed to wildfire hazards is likely to rise. As a fire in a densely populated region can do far more damage than a larger, more remote event.
But this peril certainly isn’t unprotected by the insurance-linked securities (ILS), collateralized reinsurance and catastrophe bond world, as insurance industry players have sought protection against the hazard for many years now.
The USAA’s Residential Reinsurance catastrophe bond series of deals has included U.S. wildfire as a covered peril since 2008, details of its latest deal, Residential Reinsurance 2014 Ltd. (Series 2014-2) can be found here.
Similarly, State Farms Merna Reinsurance III Ltd. $250 million catastrophe bond from June 2010 also covered U.S. wildfire, as does Chubb’s soon to launch East Lane Re VI Ltd. (Series 2015-1) transaction.
So it’s clear that investors and cedents alike are happy to add some wildfire coverage into their exposure, while also adding some welcomed diversification to their portfolios.
And, as insurers and reinsurers are increasingly looking for new, innovative and emerging markets to put some of the ample reinsurance capacity to work, the continued threat of wildfires could gain greater attention.
Looking forward into 2015, CoreLogic said; “As in the past, wildfire risk in 2015 will be highly dependent on both weather and human factors.”