Data-driven advancements in European wildfire risk management

As greater regulatory and industry attention is paid to the evolving risk landscape, Guy Carpenter’s Dr Jessica Turner explains why a data-driven approach to assessing and managing wildfire risk is beneficial.

Wildfire risk has attracted attention worldwide in recent years, but wildfire risk in Europe is considered a low-materiality peril. In recent decades, in fact, the number of burnt hectares has declined across the region, while average fire sizes have also decreased, reflecting in many cases improved fire management practices.

Yet changes in land use patterns and shifts in local populations are creating an environment where proactive wildfire risk management is increasingly valuable. The decline in the use of land for agriculture and the transition of rural populations to cities has resulted in an increase in the encroachment of shrubs and trees across numerous regions.

As risk views in Europe evolve and the industry becomes more sophisticated and sensitised to the need for proactive management, there are increasing impacts relating to industry regulation and solvency requirements.

In July 2021, the European Insurance and Occupational Pensions Authority published its ‘Methodological paper on potential inclusion of climate change in the Nat Cat standard formula’, which states: “Further work is needed to investigate whether additional climate change-related perils such as droughts and wildfires could be better captured in the Solvency II framework under the Nat Cat risk sub-module.” Companies that pro-actively focus on leveraging emerging data and technology solutions will be most effectively positioned to respond to any future requirements.

Insurers have repeatedly demonstrated their ability to adapt and respond to shifting priorities.

Technology is bolstering the evolution of the (re)insurance sector on all fronts. Insurance companies have a long history of innovating around products and analytics, and with each technological advancement insurers are better able to improve their risk management.

The challenge for the industry is that given the relatively low peril status of European wildfire risk, there are no related wildfire models currently available. As insurance companies are becoming increasingly conscious of the benefits of proactively managing potential accumulation risk and with the introduction of climate change into solvency calculations and the growing requirements for climate-related financial disclosure, demand for data-driven wildfire assessment is growing.

However, companies are not starting with a blank sheet. There are multiple sources of fire weather danger indices which are based on weather-derived variables such as temperature, precipitation and wind. Other data layers relevant to fire risk, such as land cover and terrain, are also available, although in the past this data has rarely been combined with the fire danger index to create a holistic picture, even though such parameters can change the pattern of the risk significantly.

At Guy Carpenter, we have been working with clients to help bridge this expanding data gap. Our recently launched GC Wildfire Risk Score builds on 10 years of risk score expertise, and incorporates multiple data layers including fire weather, vegetation, topography and building structure to create a high-resolution data layer that differentiates between six wildfire risk categories ranging from ‘very low’ to ‘extreme’.

The data can be used to generate two types of risk scores – one for properties at risk across Europe and one for risk to forestry for the Nordic region. In addition, various climate change scenarios can be applied to modify the risk scores based on a series of meteorological variations over time ranging from near current climate to an increase of +3.0 degrees.

Access to this wildfire-specific data, and in particular the ability to apply these meteorological variations mapped to climate-related projections created by bodies such as the Intergovernmental Panel on Climate Change, will become increasingly important across business functions. Not only will it enable companies to manage their accumulation exposure and improve underwriting performance, but it will also allow them to meet increasingly stringent regulatory requirements and growing demand for climate-related financial transparency.

The enhanced access to data and ability to combine multiple data sources into actionable intelligence for perils like wildfire across Europe allows companies to adopt a data-driven approach. Companies are able to adequately assess their current and future exposures and gain a more accurate understanding of their risk going forward.

Events over the past 18 months have increased sensitivity to addressing the “what if” risk scenarios before they happen. The need to identify and evaluate evolving and emerging risks in a comprehensive and thoughtful manner is heightened. A holistic approach to enterprise risk management empowers insurers to deal with this evolving risk landscape. Integrating advances leveraging data and technology will lead to actionable preparedness plans and solutions.

Jessica Turner, PhD, ACII, is managing director, catastrophe advisory, international at Guy Carpenter.