Brought to you by:

Guy Carpenter warns of ‘catastrophic’ bushfire risk

Guy Carpenter says insurers and reinsurers must reassess the growing bushfire threat to avoid a “catastrophic claims event”.

The global reinsurance broker says bushfires – or wildfires as they are called in the US – are becoming “larger and more severe”.

MD Robert Reader says the concerning trend is caused by the changing climate plus increasing development in at-risk areas.

“Wildfire-related losses have significantly increased in the past several decades as more and more properties have been built in such areas — the areas where human development encroaches on and interacts with natural woodlands or vegetation that is at high risk for wildfire,” he said.

Mr Reader says insurers and reinsurers must “refine customer selection” using enhanced underwriting techniques to prevent “a potentially catastrophic claims event”.

“While personal lines may be the most affected line of business, commercial portfolios can also be exposed,” he said.

“Insurers writing in areas with high wildfire risk could sustain abnormally high losses compared to their peers.

“Without knowledge of the risks, (re)insurers cannot develop a proper underwriting strategy that takes the specific risks into account.

“Relying on historical data only is not adequate for estimating wildfire risk because of the changing nature of the risk due to the development of the WUI [wildland urban interface].

“Insurers must evolve their risk assessment strategies using catastrophe models that account for a wide range of complex factors and do so on a regular basis as the territorial factors change over time.”