Global warming could lead to more wildfires, losses: Lloyd’s

Insurance carriers can expect to see an increase in losses from wildfires, as average temperatures increase wordwide, while Canada ranked third in economic losses due to wildfires over the past 23 years, a recent Lloyd’s report warns.

“The combination of predicted increase in global temperature and extreme climatic conditions, coupled with a growing world population and land use changes is expected potentially to lead, overall, to increased fire occurrence, area burned and probably also more severe and therefore damaging wildfires,” states the report, titled Wildfire: A Burning Issue for Insurers? “An overall increase in losses might therefore be expected.”

Quoting from a 2005 article in Climatic Change, Lloyd’s stated that in Canada, an increase — by 74 to 118% by 2100 — in area burned “has been suggested.”

“In California, where a high population density in the Wildland Urban Interface puts lives and property at a particularly high risk, estimated future changes in area burned range from a 41% increase for the San Francisco Bay area and the Sierra Nevada to an 8% decrease for the north coast of California,” according to the report, released Sept. 24.

While property is the insurance line “most exposed” to wildfires, there is also an exposure for liability and business interruption writers.

“Commercial property policies with business interruption coverage vary widely with regard to coverage of business income loss due to order of civil authorities,” Lloyd’s stated. “Some policies require direct physical damage to the property before business interruption coverage is triggered. Generally, under these types of policies, where the order of civil authority (and not physical damage) causes the business interruption loss, coverage is not triggered.”

The report was written by two academics at Swansea University in Wales: Geography professor Stefan Doerr and postdoctoral research fellow Critina Santin.

Lloyd’s included estimates of losses from EM-DAT, a database maintained by the Collaborating Centre for Research on the Epidemiology of Disasters. For example, EM-DAT statistics show that between 1984 and 2013, there were 303 wildfire events worldwide. These killed 1,940 people and caused US$52.3 billion in economic losses. By contrast, during the same period, 758 seismic events killed nearly 850,000 and caused nearly US$698 billion in economic losses.

“Global estimates of losses are typically based on limited data and caution is advised when using these,” Lloyd’s added.

In North America, between 1984 and 2013, 118 wildfire events have killed 234 and caused US$25.2 billion in economic costs. When economic costs were ranked by country, Canada — with one event in 1989 costing US$4.2 billion — was second only to Indonesia, where an event in 1997 caused US$8 billion in losses.

When EM-DAT ranked the 20 countries most affected, in economic damage, by wildfires during the period 1990 through 2013, Canada ranked third (at US$6.4 billion over 20 events), behind the U.S. (with US$17.8 billion) and Indonesia (at US$9.3 billion).

Quoting from a Swiss Re report, Lloyd’s noted that in Canada, the Slave Lake wildfire in 2011 triggered $700 million in insured losses. At the time, the Slave Lake wildfire was the second-costliest natural disaster in Canada, when measured by insured losses. That was before the floods last June in Alberta and the July 8 rainstorm in Toronto.

Lloyd’s noted wildfires are “part of the natural cycle of many ecosystems and human intervention can typically only delay but not stop its occurrence.”

Mitigation strategies require a joint effort by government and private owners, Lloyd’s noted.

“Different public policies can increase the commitment of private landowners, such as subsidizing private spending on fuel treatments, enacting legislation that marries insurance availability and premiums to risk mitigation behaviour and providing education about wildfire risk and mitigation,” Lloyd’s stated.

“Public incentives can be made conditional upon a threshold level of private mitigation effort being achieved, which ensures private commitment. Regarding insurance coverage, mitigation information can be used to set premiums. However, insurers may have difficulty in verifying mitigation by policyholders, and they would also need similar information for adjacent properties.”