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Commercial risks grow as wildfire losses spread

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Long-term drought over much of the United States is exacerbating the perennial risk of wildfires as greater commercial building in fire-prone areas expands the threat beyond homeowners.

Experts say the risk from such building on acreage once considered wilderness is starting to catch the attention of commercial insurers.

“The drought's the talk of the town,” said Chris Drobny, a Los Angeles-based property risk specialist at Chubb Corp., who said the wildfire risk to businesses is a “big unknown.”

What is known, fire and climate experts say, is that the likelihood for major brush fires this year and beyond is high. In 2014, the National Interagency Fire Center reported 63,612 U.S. wildfires that burned more than 3.6 million acres; in 2013, 47,579 fires burned 4.3 million acres.

A report issued in early May by the center's Predictive Services put much of California, western Nevada, southeast Oregon, and across Oklahoma and Texas in extreme to exceptional drought conditions — with “above normal fire potential” in California especially.

The Lincoln, Nebraska-based National Drought Mitigation Center, which tracks the nation's drought conditions weekly with levels ranging from D0 to D5, reported in late April that most of California, Oregon and Nevada fell into the extreme D4-D5 range.

“It'll burn somewhere,” said Thomas Welle, Denver-based senior project manager at the Quincy, Massachusetts-based National Fire Protection Association. “The (multiyear) drought in California and parts of the Midwest is going to play a significant role. When you get into those long drought patterns, vegetation becomes extremely stressed and is much more susceptible to fire.”

The four-year drought has expanded the wildfire season from a few peak months in the late summer and fall depending on where one lives to a year-round risk, said Arindam Samanta, Lexington, Massachusetts-based senior manager of underwriting products and analytics at Verisk Climate, a unit of Verisk Analytics Inc. that studies natural disasters and conducts risk analysis for insurers and governments.

“The approach we take is that the risk is now active throughout the year ... that this can happen anytime,” Mr. Samanta said.

CoreLogic Inc., an Irvine, California-based analytics firm, recently released its annual estimates of wildfire exposures in the U.S. West. Its 2015 estimates are aimed at residential properties, which it says could result in $237.3 billion of damage in high-risk and very high-risk areas of seven states this year. In its last report, for 2013, that estimate was set at $189.2 billion.

The report concludes that the cost of wildfires will grow because of development of what experts refer to as the “wildland-urban interface.”

In the U.S. West, nearly 40% of new-home development is in this wildland-urban interface, according to Verisk Climate.

Though there is no research on commercial building in these interface areas, experts say commercial building in fire-prone areas is increasing

“What we are seeing are more residences, commercial properties and developments in the areas that are and have always been high-risk,” said Tom Jeffery, a Madison, Wisconsin-based senior hazard scientist at CoreLogic. “The risk is enhanced because of the drought ... individuals are paying more attention because of the drought.”

Wildfires, typically ignited by lightning or human negligence, are among the most unpredictable of natural catastrophes. Changes in wind speed and direction make predicting a fire's path difficult and leave little or no time for warnings.

When examining total costs, fire fighting and prevention, loss of property and businesses are often tallied separately. Health expenses associated with the environmental hazard of a major brush fire often are not counted. However, most experts put the totals in the billions.

According to Munich Reinsurance Co.'s NatCatService data-base, U.S. wildfire, heat and drought losses totaled $1.7 billion in 2014. For commercial insurers, experts say the wildfire risk hasn't been a hot topic, but that is changing.

“I think it's probably because wildfires are becoming more prevalent,” said Peter Jagger, a Dallas-based managing director at Aon Global Risk Consulting. “Clients don't think about it until it happens. Now, we have clients who have experienced wildfire and who've seen the devastation. It's one of those risks they are looking at and trying to prepare for. There seems to be interest from clients on how to model wildfire as a risk and how to look at it from a pre-loss and (how to) mitigate response.”

“The research is unprecedented,” said Garner Palenske, a San Diego-based senior vice president at Aon Fire Protection Engineering. Mr. Palenske said several private firms and government agencies are studying the effect.

Businesses “need to make sure they have the right types of insurance: business interruption, contingent business (interruption) and supply-chain management,” said Janet Ruiz, San Francisco-based California representative of the Insurance Information Institute. “(Businesses) are becoming more aware of this.”

Still, some insurers say business interest in wildfire coverage will continue to lag that of other natural disasters, such as storms and earthquakes.

“Everybody expects worse fires in general, and what doesn't get talked about (are how) large industrial occupancies (are) affected by this,” said John Frank, Atlanta-based loss prevention center of excellence leader at XL Group P.L.C. “That's what we are focusing on and trying to get (our clients) focused on.”

“We try not to insure a lot within certain areas,” said Chubb's Mr. Drobny, of businesses in wildfire-prone areas. While “we are not seeing many (commercial) clients exposed to wildfire, generally and historically,” the focus is on risk management rather than insurance for clients exposed to wildfire risks, he said.

Best practices include removing brush around at-risk properties and sealing building exteriors with metal-mesh frames to prevent embers from entering, he said.