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Fire losses spark exposures among insurers, reinsurers

Fire losses spark exposures among insurers, reinsurers

Bushfires raging in Australia are the latest iteration of a peril that is growing in importance to insurers, necessitating better analytical tools and a review of definitions, sources say.

While losses from fires in Australia and the western United States have not reached the scale of some other natural catastrophes, modeling firms are developing new tools and reinsurers are considering revisions to their policy and treaty wordings in response to the rising losses.

As of Jan. 14, insurers had received 13,750 claims in New South Wales, Victoria, South Australia and Queensland from the November-January bushfire catastrophe, according to a spokeswoman for the Insurance Council of Australia, and insurance losses are estimated at 1.34 billion Australian dollars ($924.5 million).

The organization also declared two earlier bushfires catastrophes – the Rappville New South Wales fire, on Oct. 10, with 225 claims and AU$19 million ($13.1 million) in losses; and the northern New South Wales/southern Queensland fire on Sept. 5, with 497 claims and AU$37 million ($25.5 million) in losses, she said.

Combined bushfire catastrophe losses since Sept. 5 stand at AU$995 million ($686 million) from 11,272 claims, according to the Insurance Council.

A Jan. 7 summit with Australian Treasurer Josh Frydenberg and commonwealth officials included representatives from insurers Allianz SE and Zurich Insurance Group Ltd., according to a statement from the Insurance Council.

They discussed how the federal government could assist claimants through engaging with state governments in relation to the coordination and potential funding of best practice government debris removal programs, particularly in relation to hazardous materials like asbestos, an Allianz spokeswoman said in an email to Business Insurance.

“Such a program could not only speed up the rebuilding process but also allow claimants to keep more of their insurance payout for rebuilding, which would also help alleviate under insurance issues,” the email said.

“The meeting between insurers and the treasurer was very constructive and positive,” she added. “There was total alignment between the industry and government on the need to handle bushfire claims with empathy and sensitivity, particularly in relation to vulnerable customers, and deal with claims as quickly as possible.”

The Australian fires are the latest example of a trend of larger losses stemming from fires, including from wildfire losses in the western United States, said Michael Young, vice president, model product management at catastrophe modeler Risk Management Solutions Inc. in Newark, California.

“Wildfire losses have been changing rapidly in the past five years,” he said. The risks need more attention and better tools for analysis, he added.

Evaluating wildfire losses by decade since the 1980s, 70% of losses have occurred in the past decade “and a big part of that has been in the past two to three years,” said Mohit Pande, head of property underwriting, U.S. and Canada at Swiss Re Ltd. in Armonk, New York.

In 2019, RMS introduced a probabilistic model for wildfires to replace what had been largely a scoring mechanism based on fire zone maps, Mr. Young said.

He said wildfires are still an “earnings level event” not quite of the magnitude of traditional catastrophes, such as hurricanes and earthquakes, but added, “we’re starting to see events, particularly in 2017 and 2018, that hit the $10 billion mark.”

“Fire-related claims will dent profits, but (the) industry’s strong fundamentals will mitigate impact,” Moody’s Investors Service said in a note on Jan. 9. “Nonetheless, the catastrophic events highlight insurers’ growing environmental risk.”

“Although we expect claims to continue to rise, dampening the sector’s profits, they are likely to be manageable,” Frank Mirenzi, Moody’s vice president and senior credit officer, said in a statement. “Despite the manageable impact for insurers, the catastrophic fires highlight that the P&C insurance industry is at the forefront of environmental risk.”

The rising losses have caused the insurance industry to take a new look at wildfires.

“That’s something that’s happening now in the reinsurance market. There’s more attention to what these definitions are,” Mr. Young said, adding such language is called “temporal and spatial clauses.”

“One area specifically that has been of interest to us is wildfires and how that’s covered in primary insurance policies and more importantly, how we contemplate it in reinsurance transactions,” said Keith Wolfe, Armonk, New York-based president of U.S. property/casualty at Swiss Re.

The reinsurer is looking at geographical and temporal parameters of wildfire events.

“That is one area we probably have more frequent discussions around – how do you define an occurrence for wildfire scenario? A lot of this has to do with time and distance,” Mr. Wolfe said.

One typical set of parameters used by the industry, according to Mr. Wolfe, is to treat fires occurring during a seven-day window and within 100 miles of each other as one occurrence.

“There are negotiations in the industry to expand the time and spatial definitions to 10, 15, 30 days,” and potentially from 100 to 150 miles or 200 miles, Mr. Young said.