Sleeping Giant: Canada’s Wildfire Risk

In 1991, fires raged through the hills of eastern San Francisco, killing 25 and leaving thousands homeless. This travesty cost insurers more than US$1.5 billion. Not since the 1906 San Francisco earthquake set that city ablaze, had the world seen fire losses on such a scale. Just two years later, the Los Angeles area was struck by wildfires that caused more than US$1.1 billion in damage and the danger could no longer by ignored. Although wildfire losses have remained a relatively small portion of insurer losses in Canada, there is growing concern that the California incidents could be repeated here and whether insurers are prepared for such events.

In late May of this year, as a forest fire spread its tentacles towards communities north of Edmonton, Alberta, residents were forced to evacuate and more than 350 square kilometers of the province was beset by six different conflagrations. The incident was just one more reminder for insurers of the lurking danger of wildfire.

Although wildfire losses have accounted for a relatively small portion of insurer losses — less than 1% each year according to Paul Kovacs, chief economist for the Insurance Bureau of Canada (IBC) — the incidents in California in the early 1990s have awakened fears that Canada could see a similar large-scale event in the future. “When the Americans experienced some very big losses, then it felt like a different issue…ten years ago insurers might not have been talking about this.”

Other concerns have been taking insurers’ attention, including raging concerns over auto insurance rates, he adds, but now is the time to start addressing the wildfire risk. As Kelvin Hirsh of Natural Resources Canada writes, “most fire officials believe that it is not a question of if a major interface fire [when forest fires threaten urban areas] will occur, but simply when and where it will happen”.

Making headlines

The Chisholm/Slave Lake, Alberta evacuation is just one of a series of Canadian forest fires that have threatened urban areas. These interface fires represent the real threat to insurers who are on the hook for property damage resulting from fire. They may also be responsible for coverage of expenses for some homeowners who have to evacuate, notes Jim Rivait, regional vice president for the IBC. Many homeowners’ policies cover these kinds of additional living expenses.

Other significant fires in recent years include one near Penticton, B.C., in 1994, where suppression costs exceeded $5 million, 18 homes were destroyed and 3,000 people evacuated. Another near Salmon Arm, B.C., in 1998 saw 12 buildings destroyed and 7,000 residents evacuated. “To date, these incidents have not been as severe as many of those in the U.S. or Australia, but they still affect thousands of people, have a significant economic impact, and the potential for a major disaster is increasing,” notes Hirsh.

Natural Resources Canada says that as of mid-September of this year, 7,206 forest fires were reported, covering 606,472 hectares of the country. In the U.S., this situation is even more serious, with 61,617 fires covering 1,231,414 hect-ares. Last year, one of the worst on record in the U.S., fire losses exceeded US$10 billion.

Canada contains 10% of the world’s forest, or 417 million hectares, with a yearly average of 10,000 fires generally occurring between April and October that burn about 2.5 million hectares. And, while this year’s fire numbers may be down, there is widespread agreement that the risk of interface fires is on the rise. Several factors are at work, including our own fire suppression policies. While Kovacs explains that Canada has among the most sophisticated fire fighting systems in the world, he adds that aggressive fire fighting increases fuel, in the form of brush. “Fires are natural things,” he observes. Canada is among the countries that have adopted prescribed burning to address this problem.

Weather is also a factor. With global warming comes drier conditions, and lack of rainfall is certainly to blame for forest fire development, says Ken Hague, senior vice president with Aon Re. Kovacs, who is also executive director of the Institute for Catastrophic Loss (ICLR), adds that there is a theory that global warming may increase the incidence of lightening. “Not everybody agrees, but there’s a sense there will be more lightening.”

But the biggest threat, all agree, is the trend for people to move to more forested areas. The U.S.-based Insurance Services Office (ISO) notes that not only has there been population movement to more rural areas, but also a lack of awareness amongst these homeowners of the wildfire risk. The same can be said for Canada, where sources agree more focus needs to be paid to the costs of interface fires. “As people expand from major metropolitan areas, then the government has to expend more resources,” notes Hague. The same can be said for insurers.

“As Canada’s populations continues to grow and disperse into hinterlands, people will increasingly build homes nestled in trees, making them more vulnerable to forest fires,” Rivait noted at the time of the Chisholm fire. Tom Johnston, operation manager for the Canadian Interagency Forest Fire Center (CIFFC), agrees. The risk of a major interface fire is increasing as “more and more people are moving out of urban areas into rural areas, not farmlands, but the bush”. Johnston, whose agency is responsible for fighting forest fires, says urban interface is becoming more and more a priority with wildland fire fighters.

Insuring trees

Of course, independent of interface issues, forest fires are also a threat to Canada’s natural resources. Unlike the U.S., Canada’s forests are government held, and therefore fighting forest fires becomes a public expense. Johnston notes that on average $350-400 million per year is spent on forest fire suppression, including prescribed burning and pre-suppression costs, such as new equipment. With the host of new techniques and tools being employed by firefighters here, the cost is always rising.

However, because of government ownership, which is also common in Europe, coverage for forests, or “standing timber”, is rare. Rivait notes that most governments self-insure against forest fire losses. “It’s a very, very small part of the reinsurance world,” confirms Nikki Fritz, group product management property for Swiss Re.

However, the government of Alberta is now looking at potential reinsurance for forest fires. Cliff Henderson, assistant deputy minister responsible for forest fire protection in Alberta confirms that the province is looking at options. “It would be insurance around expenditure and not resource losses,” he explains. This means the excess coverage would be used to cover suppression costs for above average fire situations.

Aon Re is working with Alberta on the plan, says Hague. To his knowledge, such policies exist on a very limited basis elsewhere in the world and not at all in Canada. He adds that the state of Oregon is one jurisdiction where such reinsurance has been used. Currently the deal is in discussions, with Aon having this unique policy priced in the international marketplace.

“Smart” approach

For insurers in Canada, there is not widespread understanding of the wildfire risk, despite its potential impact specifically in interface fires. ISO notes that insurers have several roles to play, including becoming educated about the hazard and passing this knowledge on to policyholders living in high-risk areas. There is also much to be done in terms of better pricing this risk, the kind of work that has gone into pricing other natural peril risks, such as earthquakes.

Developing appropriate underwriting guidelines, measuring and managing the wildfire interface exposure in a book of business, particularly in terms of geographical concentration of a book of business in a high-risk area, are all steps insurers are going to need to take as awareness of this risk grows. Kovacs, who is among the first to look into this risk in a Canadian context, says part of the ICLR’s role is to look at these kinds of risks and to educate the industry. Although much interest was created by the California fires in the early 1990s, he says there is still much to learn. “We’re trying to be ready if insurers start asking questions.”

Governments have been looking into this issue for some time, and have published guidelines known as “Fire Smart” for homeowners living in high-risk areas. The Fire Smart approach includes such strategies as spacing trees on property far apart, having cleared areas between structures and forested areas (known as firebreaks), and using less flammable materials for roofs and eaves.

Dollars and cents

So far, insurers have not played a significant role in wildfire mitigation. And there is still a lack of substantial information on wildfire risks from which insurers and reinsurers can understand their exposure.

While risk assessment tools have been developed for other natural perils such as earthquake and tornado, the same cannot be said for wildfire, says Gerry Lemcke, expert in climate and storm meteorology with Swiss Re. “There’s no tool for reinsurers to look at widespread risks.” He expresses hope that now that reinsurers have a handle on larger exposures, more attention will be given to smaller risks such as wildfire.

But, Lemcke says there is still a lot of work to be done to understand this risk. “I get the feeling that it’s still in its infancy, at least on a global scale.” In the U.S. and other heavily affected countries such as Australia, more tools are available to insurers to appropriately price the risk, but these are largely based on past losses, rather than the potential for future disasters. “The pricing of insurance coverage for property in areas exposed to wildfire should take this special hazard into consideration. If this exposure is indeed increasing, it will manifest itself in a correspondingly higher number of wildfires, which will raise property insurers’ loss burden. This, in turn, will affect the cost of insurance coverage,” says Fritz.

Burning cost, or claims history, has been the tool of choice, in the absence of predictive modeling, concurs Lemcke. “We try to think about the premium needed to cover losses where there aren’t sophisticated risk modeling tools…If you see more losses in one area, then price becomes an issue.”

Lemcke acknowledges that given the relatively small size of wildfire losses, they are not likely to dominate the insurance agenda. They are not among the top ten of catastrophe losses, “the frequency is high, but if you look at the losses, they are quite small”. Unless wildfires increase as a loss issue, then certainly more attention will be paid to such things as modeling and pricing. “If we see in certain markets 20-25% of the average loss burden come from wildfires, then definitely [insurers will take note]. It’s clearly loss-driven. It’s clearly claims driven.” Lemcke explains, “we have to prioritize, we have to look at perils that are most important to your business”.

Collaborative effort?

Added to the lack of attention to risk modeling for wildfires, insurers have not yet taken steps to address risk mitigation strategies. Johnston expresses some dismay that insurers have yet to price policies in light of homeowners’ adherence to Fire Smart guidelines. “I understand it’s not a priority with insurance companies,” he says. In having rates that do reflect good fire prevention practices and treating wildfire as an acceptable risk, “somebody in the city is subsidizing somebody in the country”, he says.

Henderson agrees that insurers should become more involved. “It would seem to us that insurance underwriters could promote improved urban interface.” He specifically refers to policy premiums not differentiating between homeowners who practice Fire Smart guidelines and those who do not. In the end, he notes, the loss in interface situations belongs to insurers. “The province does not offset any compensation to a resident for damage as a result of fires, it’s an insurable loss.” Insurers have a vested interest in ensuring homeowners and businesses take the steps to make their buildings more resistant to fire. “There are some opportunities here for the insurance companies.”

Kovacs says the Fire Smart publication is very useful, and he is aware that in the U.S. insurers have in some cases put such pamphlets in homeowners policies in affected areas, as well as the ISO pricing model. These things may in time come to Canada as awareness of the issue grows. Both he and Rivait are talking to government agencies about the wildfire issue and what role insurers might play in the future. At the time of the Chisholm fire, Rivait had expressed hope for the development of a “National Disaster Reduction Plan” that would include funds for communities to put in place preventative measures, such as firebreaks. This plan has since been launched, although where wildfires will fit in with the plan remains to be seen.

Paul L’Arivee, manager of communications operations for the Office of Critical Infrastructure Protection and Emergency Preparedness (OCIPEP), says that fire prevention is a provincial or territorial responsibility. His office’s role is to deploy disaster financial assistance in an interface situation, to cover those things not already covered by individual insurance. He does say that if insurers would use rate reductions to encourage homeowners to meet Fire Smart guidelines “that’s something that would be applauded”.

Rivait and Kovacs say that there is much to be learned by insurers about the wildfire threat, and discussions with the government will be taking place in the future. “What I think would be great is some collaborative effort,” says Rivait, adding that this could include the promotion of ideas such as Fire Smart and other wildfire prevention strategies. Hague says discussion will be key to moving forward on the issue. “In the insurance industry there is very little knowledge of forest fires and conversely, practitioners of forest fire fighting know very little about us.”