The risk of wildfires in North America is on a subtle yet significant rise. As recent events have shown, wildfire in North America poses a severe and increasing financial risk to the industry.
Almost 25 percent of insured catastrophic wildfire losses in the U.S. were recorded between 2020 and 2023, underscoring this increasing financial threat.
Despite the occurrence of just one billion-dollar loss event in 2023, the scale of wildfires has expanded alarmingly. For example, 7.9 million acres were consumed by flames by the end of September 2024 which exceeds the average of the past decade by a notable margin.
These trends point to an increase in both the frequency and severity of wildfires, signaling an urgent need for a greater understanding of the risk within the industry. Furthermore, it underscores the critical demand for improved and more sophisticated risk management strategies to mitigate the escalating wildfire threat.
Wildfire risk is particularly pronounced in the wildland-urban interface (WUI), where the blend of natural landscapes and human settlements increases the risk and the modeling complexity.
Over the past three decades, the WUI has expanded considerably, now encompassing millions of homes and underscoring the critical need for a reevaluation of traditional wildfire risk methodologies.
As we delve into the complexities of this issue, it becomes evident that addressing the evolving wildfire dilemma requires a multifaceted approach, combining improved risk assessment techniques with a broader understanding of the environmental, economic, and societal impacts of these devastating events through more advanced catastrophe risk modeling.
Failure to act can lead to substantial gaps in loss estimation accuracy, underscoring the need for an advanced approach
Introducing Moody’s RMS North America Wildfire HD Models Version 2.0
The launch of Version 2.0 signifies a pivotal evolution in wildfire risk modeling, offering a comprehensive solution to the evolving challenges in the industry. This version enhances the foundational insights gained from Version 1.0, addressing the dynamic shifts in wildfire risk across the U.S. with advanced analytical precision.
Aimed at equipping stakeholders with a superior tool for risk evaluation, Version 2.0 enables a deeper understanding and more effective management of wildfire complexities.
It incorporates significant enhancements that respond to recent increases in wildfire severity, expanded exposure in high-risk areas, rising reconstruction costs, and evolving regulatory and market dynamics.
These improvements collectively lead to loss changes across all regions in the U.S., reflecting the critical need for and value of this updated model. The key features of the model include, but are not limited to:
- Expanded Geographic Coverage: Recognizing the importance of comprehensive risk assessment, the model geographic coverage is expanded to include the Hawaiian Islands alongside the continental U.S. and Canada. This expansion is particularly pertinent in light of recent catastrophic events such as the Lahaina fire, underscoring the evolving wildfire risk in these regions. This wider geographic coverage ensures that clients have a more complete understanding of their exposure across North America.
- Comprehensive Risk Profile: The expansion of the model stochastic catalog results in a robust event set, which combined with improved ignition modeling at the community and location levels, facilitates in-depth risk analysis. This comprehensive dataset is pivotal in understanding the tail risk profile associated with wildfires.
- Advanced Hazard Modeling: Version 2.0 incorporates the latest fuel data, historical fire databases, and burn probability maps, maintaining accuracy and relevance in hazard modeling. The model deploys an explicit approach to capture the state of 'climate change to date' which allows for better simulation of fire weather parameters, enhancing the model's utility in adapting to current and future conditions. This approach ensures that risk assessments are grounded in precise and current data, offering a reliable basis for strategic planning.
- Vulnerability Improvements: By refining damage curves and introducing more sensitive secondary modifiers, the model achieves a finer differentiation of risk. This improvement in model vulnerability allows for a more accurate estimation of potential losses, enhancing its utility for wildfire risk underwriting by ensuring a high degree of accuracy
- Urban Conflagration Modeling: Version 2.0 includes an urban conflagration module specifically calibrated to assess the vulnerability of built environments to wildfires. This module, with its increased number of simulations, addresses the uncertainties in urban conflagration modeling, providing a more accurate assessment of urban fire risk.
- Specialty Models: The expansion of secondary modifiers and the introduction of specialty models, such as the Industrial Facilities Model, Builders Risk Model, and Marine Cargo Model, provide targeted insights for unique risks. These additions allow for a nuanced evaluation of mitigation measures and compliance with evolving regulatory requirements, offering tailored solutions for specific sectors or exposure types.
Proactive Risk Management and Regulatory Compliance
An effective wildfire risk management strategy includes taking steps to reduce the likelihood of property damage.
To facilitate the cost-benefit analysis of these mitigation measures, the model incorporates an array of modifiers, including assessments for community-level mechanical thinning and other property-level hardening measures, aligning with recommendations from organizations like the Insurance Institute for Business & Home Safety (IBHS) and Firewise USA, and ensuring compliance with regulatory bodies such as the California Department of Insurance.
Building on the capabilities of Version 1.0, the latest version of the models further enhances its geohazard features by incorporating the modeling of landscape-scale fuel modifications and forest management efforts.
This significant enhancement allows for a more accurate assessment of wildfire exposure by reflecting the model's adaptability to evolving landscape management practices and proactive mitigation efforts, such as creating defensible spaces, that significantly impact wildfire risk.
These features not only enhance the model's capacity for proactive risk management but also facilitate the evolution of insurance policy terms and conditions to align risk and cost and enable a healthier insurance market to provide the coverage as needed for economies subject to wildfire risk.
A Tailored Approach for Utility Wildfire Mitigation
Understanding the role of utility infrastructure in wildfire ignitions has become a crucial aspect of risk assessment. Version 2.0 of the wildfire models places a strong emphasis on understanding and mitigating utility-related ignitions. Our work with utilities, including Southern California Edison, illustrates how focused mitigation efforts can significantly help reduce wildfire losses
The explicit attribution of utility failures to associated ignitions and the incorporation of mitigation-to-date impacts underscore the model's capacity to inform strategies for reducing wildfire ignition risks. By explicitly modeling utility-related ignitions, the model incorporates new information, data, and investments in utility mitigation.
Users can model subrogation impacts on expected losses, providing a deeper understanding of utility failure contributions to ignition and the effectiveness of mitigation and adaptation features at both the location and community levels.
By incorporating data on past utility failures and their contributions to wildfire ignitions, alongside the ability to model the impact of ongoing and future mitigation activities, the models offer a comprehensive view of how utility infrastructure interacts with the broader wildfire risk landscape.
Accessing the Models through Moody’s Intelligent Risk Platform
The Risk Modeler™ application, accessible on Moody’s Intelligent Risk Platform™, serves as the gateway to the North America Wildfire HD Models. Utilizing cloud computing technology, users can input their data, select analysis settings, and receive detailed loss statistics and distributions.
This process is streamlined by the pre-compilation of millions of fire footprints for the U.S. and Canada, which, when combined with vulnerability and financial data, provide a comprehensive assessment of potential insured losses.
In summary, the Version 2.0 models represent a significant leap forward in the quantification and management of wildfire risk. By integrating cutting-edge science, embracing technological advancements, and responding to the evolving needs of the (re)insurance industry, these models offer an unparalleled tool for navigating the complexities of wildfire risk.
As the threat of wildfires continues to grow, the insights and capabilities provided by the latest version of the North America Wildfire HD Models will be indispensable in developing effective risk management programs.
