Wildfires: climate change and human activity fan the flames

• Record-breaking fires are occurring more frequently and in landscapes that were previously rarely affected.
• Climate change, land use, human activities, invasive species, and previous fire suppression policies have made some landscapes more flammable.
• A wildfire can impact multiple insurance lines, with insureds being both an initiator and a casualty of wildfires.
• Legislation is driving a duty of care, especially around building standards, land management, and fuel reduction. 

Australians often describe their land as a “sunburnt country”, but these days, their landscape is often more charred and smoking than well-tanned. Wildfires have always been a hazard Downunder. It comes from being the driest continent on earth (excluding Antarctica) combined with high temperatures and vegetation evolved over eons to need regular burning for its propagation.

Yet the nature of wildfires in Australia (and elsewhere) is changing. In some locations wildfires are becoming more frequent and intense every year. Data shows fires such as those experienced in Australia today are four times more likely than in pre-industrial times. [1]  Wildfires are also burning larger areas, and the time between fires in the same area is getting shorter, which means places are burning more frequently than before. [2] 

“Historically, Australia has been a ‘tinderbox’ in summer,” says Basil Taylor, Head of Risk Consulting at Allianz Australia. “But we are now seeing that when losses arise from bushfires, they are much more severe, and the time it takes a fire to go from zero to severe is much shorter.”

During the last devastating season (2019-2020), known as the “Black Summer”, fires burnt nearly 21mn acres (8.5mn hectares) of forests, mainly in New South Wales, as well as in Victoria and Western Australia. [3] In New South Wales, the location of the greatest human impact, over 13.5mn acres (5.52mn hectares) of land burnt, 26 lives were lost, and 2,476 homes were destroyed. Thousands more buildings were damaged. [4] The last of the bushfires were extinguished in New South Wales on March 2, 2020, after 240 consecutive days of burning. [5] 

To put Black Summer into context, the 2018 California fires that hit worldwide headlines saw nearly 2mn acres (800,000 hectares) burn. The 2019 Siberian fires covered 6.7mn acres (2.7mn hectares). Taylor explains the Black Summer was the largest natural catastrophe in Australian history, incurring around AU$2.6bn ($1.71bn) losses for the insurance industry. [6] The extent of forest burnt was greater than in any year since the early 1930s. [7]

Across the Pacific, a similar trend is evident. While the number of wildfires in the US has declined slightly over the last decade, the area burnt each year and the average size of wildfires have increased since the late 1990s. The number of fatalities and property losses also increased after 2017, with four of the five years from 2017 to 2021 being considerably worse than any year since at least 1990. [8] 

Globally, it is estimated 5% of wildfires start naturally. In the US, 85% of wildfires are estimated to be started by humans, with more than half of wildfires in Canada, which has a much lower population density, sparked by lightning. [9]

“Wildfires can be natural occurrences, but the kind of behavior and the times, places and conditions they are igniting in are becoming more unusual,” says Jenise Klein, Regional Head of Property for North America at Allianz Commercial. “Look at the catastrophic wildfires of Hawaii in 2023. They occurred in a place that, while it had a history of wildfire, had not experienced such catastrophic events historically, and the loss of life and property was on a scale not experienced before.” 

Mullarkey explains far more interest is being applied to modeling wildfires than a decade ago. “However, modeling the potential insured losses from wildfires is extremely difficult. It is not as probabilistic as hurricanes or earthquakes.

“The large number of human-made and natural factors make this risk exceedingly complex,” Mullarkey explains. “Still, the industry is continually developing and updating hazard zones and loss simulation models to improve risk assessment, but we are probably still in a reactive phase.”

Klein adds that in addition to climate change, four factors make landscapes more flammable: land use, human activities, invasive species, and past fire suppression policies.

“As our urban areas expand into wildland, it can increase the likelihood of fires because we disrupt natural fire regimes – the characteristics of fires in an ecosystem over a period of time – which can lead to more severe and less predictable fires,” Klein adds. “Invasive species can also play a role as they often grow more rapidly than native plants and can create conditions more prone to burning.” 

Invasive grasses played a significant role in the 2023 Hawaii wildfires that destroyed the town of Lahaina, claiming over 100 lives. For example, Guinea grass can reach a height of 10ft (3m). Such grasses tend to dry earlier in summer and decompose more slowly, which creates readily burnable fuel.

Klein explains that past fire suppression policies aimed at extinguishing wildfires as quickly as possible led to an accumulation of underbrush and deadwood in many forests. This build-up has created more combustible forests within increasingly populated regions.

Climate change is intensifying the impact of many natural catastrophes. Flash, river, and surge flooding are becoming more destructive, hurricanes more intense, and droughts are longer and more severe.

However, Carmichael adds: “Wildfire is unique among other ‘Acts of God’ in that humans have the ability to directly cause wildfire events, but also in many cases stop or reduce the scale of them. The role of humans introduces insurance liability exposures to parties whose activities might trigger wildfires.”

Companies in Australia and the US have been subject to litigation because of negligence. One Australian grid operator was hit with two class actions from the devastating 2009 Black Saturday bushfires [14], Carmichael explains. “The settlement was AU$300mn for one fire believed to have been started by a fault in an electrical conductor on a power pole. In a separate matter, the operator paid AU$378.6mn [15] to settle a claim against a fire caused by an ageing power line.”

In California, PG&E, the state’s largest utility company, filed for Chapter 11 bankruptcy in January 2019 after facing potential liabilities of $30bn from several fires. [16] These included the November 2018 Camp Fire, the deadliest and most destructive in Californian history.

“Wires wear and can clash in strong winds, poles may fall if not properly maintained, and lines sag in hot weather, all of which may result in electricity arcing into nearby vegetation and igniting a wildfire,” says Carmichael. “Given the increasingly litigious nature of society, liability insurance is a must for companies that operate outdoors in rural settings and in the wildland-urban interface. After a fire, there will be conjecture about who was responsible, especially if a company has failed to meet what is considered due care and obligation.”

Given the changing nature of wildfires, companies must assess their potential exposure and develop appropriate plans to mitigate risks. They need to think about resilience and sustainability and determine how the environment around their assets is changing, says Mullarkey.

“This is not just exposure of assets but also their supply chain,” Mullarkey explains. “If a key company that makes a specific component goes down, it can close a manufacturer for several months. As we insure against such losses, we are looking at the complexities of wildfires far more intensively and educating our underwriters to do the same.”

Carmichael says: “The triggers for wildfires and their behavior once they start are complex. Companies need an organizational understanding about the threats of first- and third-party exposures, including how they could trigger or exacerbate a wildfire event. They also require comprehensive risk mitigation planning and to be assured of external support from their insurers and research and emergency response organizations.

“A destructive wildfire can impact multiple insurance lines, more so than other nat cat events,” Carmichael adds. “In some events, insureds can be both an initiator and a casualty of wildfires.” 

In response to wildfires, policies and regulations are changing on both sides of the Pacific to manage and mitigate the risks. Following the Black Summer bushfires, Australian states have proactively reviewed and adjusted their fire management and land use policies, especially regarding building codes and standards and land management and fuel reduction.

Similar trends are observable in the US, where states like California have tightened regulations on utilities, requiring them to update equipment, implement power shutoffs under extreme fire risk conditions, and better manage vegetation around power lines.

“What is best practice is something of a moving target,” says Carmichael. “Wildfires are likely to remain low frequency but high impact, so how much resource do you devote to mitigation and preparation compared to high frequency, low impact events? It can be a tough line for companies to walk. Still, the trends are clear: wildfire risks are increasing, legislation is driving a duty of care, and companies need to be on top of this.”

This article is taken from the latest edition of Allianz Commercial's biannual client publication, Global Risk Dialogue, which features a number of insights on risk management and insurance topics around the world.

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