Parametric insurance coverage for wildfires is emerging as an additional tool to manage fire risk as the peril continues to grow, according to industry sources.
The recent outbreak in the Los Angeles area is the latest in a series of catastrophic fires that have demonstrated the need for more risk management tools, such as parametric wildfire coverage, they say.
Advances in data and modeling have helped expand the parametric sector. The coverage, which has been 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, reliable and correlated to the risk,” Mr. Mayer said.
Data related to exposures is becoming more reliable and more available, he said.
Improved data has made capital providers more comfortable with risk quantification and drawn more resources into the sector, Mr. Mayer said.
Parametric cover for wildfire is more “nascent” than index-based coverage for perils like wind and earthquake, however, “we certainly are seeing more clients take it up,” he said. The recent fires may spur more interest and potential clients include municipalities and homeowners associations, he said.
Parametric wildfire coverage can be a reinsurance product for a primary portfolio of residential insurance, or a primary policy for a commercial or residential structure, sources said.
Products are tailored for each client 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.
“To date, take up has tended to be by property owners outside urban areas, the so-called wildland-urban interface, and has typically been more focused on commercial rather than residential properties, such as timber investment organizations, trust funds, homeowner associations and carbon-credit developers,” he said.
A reduction in conventional coverage for homeowners and high-value properties may stimulate more demand for the coverage, Mr. Touffut said.
“Since many conventional insurers are reluctant to cover higher-risk properties at all, or to extend coverage beyond the basic limits, the parametric market’s phones are ringing,” he said.
“Things are happening in the space, and we are placing coverage. The amount 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.
The California wildfires also show the complexity of the peril and the extent of potential losses, which can be a concern for capital providers considering the sector, Mr. Franco said.
Modeling is also critical for parametric coverage, he said. Wildfires present unique modeling challenges, from atmospheric changes, like 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., which does business as Kettle, uses a proprietary wildfire model, said Isaac Espinoza, its San Francisco-based CEO.
Kettle’s Fire in Parcel coverage is written on an excess and surplus basis through a Lloyd’s of London syndicate with limits of up to $10 million for policyholders such as homeowners associations, golf courses and wineries, he said.
Kettle sold its first coverage in 2021 and has more than 100 policies in place, Mr. Espinoza 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 where it’s sometimes been withdrawn, and for reinsurance and retrocession following the wildfire experience, not just in California and Hawaii but also Australia, Canada, Greece, and other markets,” he said.
Inquires began before the recent fires as capacity tightened, Mr. Sabatié said.
“Fire at location” and “area burnt” are among the most common coverages, “but parametric coverage is about the art of the possible,” Mr. Sabatié said. Coverages could be developed using different structures and triggers, such as structures destroyed in a county or declaration of a wildfire emergency, he said.
