Q&A: Bob Frady, vice president of Guidewire and founder of HazardHub
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Managing wildfire risk is an increasing concern for reinsurers.
What’s driving the increase in wildfire losses we’re seeing today, Bob?
For us, the primary driver of wildfire risk is not climate change, it’s population change.
There are some impacts from climate change, but the bigger impact is that people are moving into areas that have always been wildfire prone. Whether it's because they want to live in a nice house in the woods, or because they have to go out into new lands because the population is expanding, and they expand into wildfire prone areas.
What do reinsurers not understand about managing wildfire risk?
I don't want to speak for reinsurers because I'm not a reinsurer, but from what I've seen, they are using exceptionally blunt tools to gauge wildfire risk. The quality of the tools has increased markedly in the last 20 years, and a lot of reinsurers aren't using them. Whether it's because they don't want to re-file or because they are just comfortable doing what they're doing. 25 to 30 years ago, these tools were really great, but they've come to the end of their useful life, and now the reinsurer is the one who ends up holding the bag, because they have to pay the excess losses.
Are there good risks in wildfire prone areas?
Oh, sure – there are lots of good risks in wildfire prone areas. There are really two types of wildfires that we worry about. The first is an all-consuming forest fire, a Bambi fire as we call it, where everybody's running around all crazy, and all the trees are on fire. Those are certainly very dangerous and very consuming, and they get the lion's share of publicity. But those are relatively easy to say, hey, if you're surrounded by the forest, chances are you're likely to run into a forest fire. it's not a huge step of logic.
The second type of wildfire that is much more concerning is the kind that engulfs entire communities where there are no trees around, yet the houses still burn. That's a combination of fuel sources like trees, but also of grasses, of overgrowing, and dried out fuel that that causes fires – and then, houses catch on fire and become fuel for other houses. The industry has typically relied on the Bambi fire models to do the job of identifying those, and these have largely failed to identify those communities that have that excessive risk from vegetation layer, not just from trees.
In that second category of risk, there are properties that are built to withstand wildfire, normally because they've cleared out the surrounding vegetation. They still have higher levels of risk than something, say, in the middle of the city, but at the same time, you can write them and you can write them a lot.
The second thing is that wildfire is not like hurricane risk: a hurricane can span hundreds of miles and impact dozens of states. Wildfires are very micro-level risks. They're very small: even the largest wildfires are small compared to population, and therefore they're much more locatable. So if you're using the right tools, you can always cherry pick the risks. The important part is you don't cherry pick too many risks. But yes, the answer is absolutely yes: there are good properties within wildfire-prone areas. But you must understand what the prone exposure is, what the wildfire exposure is, before you can make the determination of how good those properties are.
You just mentioned potentially trying to avoid cherry picking too many. How should reinsurers be looking at their aggregation of wildfire risk?
There are two levels of analysis. The first is what we'll call the resting or inherent risk of wildfire at a property. That's a condition of how close you are to fuel sources, what fuel sources are around, have there been wildfires there before, and what did the satellite data tell you about vegetation burn points – all sorts of things like that. Because sometimes you're just surrounded, no matter how well you protect your house.
So the first level of analysis is that you break out the universe into a series of buckets from high risk to low risk. And then within those buckets, you find the survivability characteristics of different types of properties. Has the vegetation been cleared? Is the property built of stucco and tile rather than vinyl and wood shade roof?
Problems can occur where you open up a whole area, and you don't judge house by house. Sometimes that community might struggle to find wildfire insurance. And people talk and they'll say OK, I want this insurance. And you'll end up with four or five houses that individually by themselves won't tip your book. But if you get too many of them together, and one fire comes through, you've concentrated your risk a little bit too much. And so knowing what the inherent risk is, and knowing what the specific risk is, and then knowing what the concentration is, are really the three keys that reinsurers should use in figuring out wildfire risk.