The magnitude of the California wildfires — which some industry estimates put as high as $50 billion in insured losses — should drive broader adoption of risk management technology to mitigate wildfire risk.

More advanced and accurate data and modeling can help insurers better assess wildfire risk, but communities and policyholders should build greater resilience to withstand the events, experts say.

The California Department of Forestry Protection confirmed Jan. 31 that the Palisades and Eaton wildfires, which began Jan. 7 after a Santa Ana wind event and destroyed several neighborhoods across Los Angeles County, had been contained.

Wildfires, severe convective storms and winter storms are frequency perils, said Karen Clark, president and CEO of Boston-based Karen Clark & Co. The catastrophe modeling company “never called them secondary perils,” she said.

Frequency perils require a different approach to windstorms and other catastrophes, using physical modeling technology that incorporates atmospheric conditions, machine learning techniques and high-resolution wind patterns, Ms. Clark said.

In a presentation at its annual client meeting last June, KCC showed where and how a $30 billion wildfire event could happen. “This fire unfolded exactly the way we said it could happen, very dry conditions, random ignition and a strong Santa Ana wind event,” Ms. Clark said.

Robust tools are available to help insurers assess wildfire risk, said Lianne Bosko, New York-based property lines technical director at Zurich North America.

“The problem for insurers is that you can have a tool that tells you what the risk is, but the risk is highly dependent on how things are implemented on the ground, how we’ve built our structures, how we’ve designed our communities, the sorts of resilience that we’re building into these areas, or not building into them,” Ms. Bosko said.

Understanding that piece is harder, she said.

The industry in general will focus on western U.S. exposures more heavily and rely more on models, said Pat Blandford, Chicago-based CEO and founder of Green Shield Risk Solutions, a managing general agent.

Green Shield focuses on risk mitigation and loss avoidance at the point of underwriting, he said.

This includes assessing building materials — roof, siding and window type — and addressing vegetation surrounding a property, ensuring there’s nothing combustible within five feet of the structure and no dead or dying vegetation within 30 feet, he said.

Advances in data and modeling have helped expand the parametric sector to include wildfire risk. The coverage, which is used to cover exposures such as windstorms and floods, is triggered by agreed data points, such as rainfall amounts or specific wind speeds.

There has been “significant” development in the parametric sector to cover “secondary perils,” such as wildfires and severe convective storms, over the past several years, driven in part by improved availability of data, said Cole Mayer, San Francisco-based head of parametric at Aon PLC.

Parametric triggers are based on an independent index that is correlated with the loss and the underlying exposure, he said.

“That requires data that’s calibrated accordingly, readily available, dependable and reliable,” Mr. Mayer said, adding that data related to exposures is becoming more reliable and more available.

Improved data has made capital providers more comfortable with risk quantification and drawn more resources into the sector, Mr. Mayer said.

Modeling is critical for parametric coverage, said Guillermo Franco, New York-based global head of catastrophe risk research for Guy Carpenter & Co. LLC.

Wildfires present unique modeling challenges, from atmospheric changes, such as winds driving them, to shifts in vegetation providing fuel.

Some insurers don’t yet fully trust the tools, Mr. Franco said. Wildfire modeling is improving, though, and he expects further progress over the next few years.

Our Kettle Inc., a managing general agent that does business as Kettle, uses a proprietary wildfire model, said Isaac Espinoza, its San Francisco-based CEO. A significant portion of its venture funding went toward building the model in the early years, he said.

The model has multiple “modules” that operate in sync and help inform each other, Mr. Espinoza said.

“First we have what we call an ignition model. This ignition model is based on a number of variables contributing to where the actual wildfires can start,” he said.

“We also have what we call a spread model. The third is what we call a building vulnerability model, and that is taking into consideration the partial loss component based on features surrounding the home that contribute to the burnability of a property.”

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Parametric Insurance products make inroads

Parametric insurance coverage for wildfires is emerging as an additional tool to manage fire risk as the peril continues to grow, industry sources say.

The coverage can be a reinsurance product for a primary portfolio of residential insurance or a primary policy for a commercial or residential structure.

Products are tailored and can range from a relatively straightforward “fire-in-a-circle” policy for high-value property owners that pays out if a fire occurs within a certain radius of the property, to fully custom “burnt area” structures, which assess the exact amount of burnt hectares, said Tanguy Touffut, co-founder and CEO of Paris-based Descartes Underwriting SAS, which writes parametric coverages.

The number of providers has increased, said New York-based Guillermo Franco, global head of catastrophe risk research for Guy Carpenter & Co. LLC.

Reliable data and reporting — such as NASA’s Fire Information for Resource Management system, which provides satellite imagery — have bolstered the viability of parametric fire coverage, he said.

Our Kettle Inc.’s fire in parcel coverage is written on an excess and surplus basis through a Lloyd’s of London syndicate with limits up to $10 million for policyholders such as homeowners associations, golf courses and wineries, said Isaac Espinoza, San Francisco-based CEO of the company, which does business as Kettle.

Kettle sold its first coverage in 2021 and has more than 100 policies in place, he said.

London-based managing general agent Skyline Partners Ltd., which specializes in parametric coverage, is seeing “many, many more” inquiries, said Laurent Sabatié, co-founder and executive director.

“We’ve seen demand for commercial property wildfire to cover carve-outs and sublimits for high-net-worth homeowners,” he said.