Pat Van Bakel, president and CEO, Crawford & Company® (Canada) Inc., explores the unique circumstances of the massive Fort McMurray wildfire, from on-the-ground challenges to claims issues and demand surge, in a seminar entitled, “On The FrontLine: New Frontiers in the Adjusting of Wildfire Losses.”
In May 2016, a massive wildfire destroyed 10 percent of the Alberta town of Fort McMurray and an area of approximately 590,000 hectares in 65 days. Rarely, post-catastrophe, do loss adjusters need protective clothing, gas masks, and bear whistles as they did when re-entering the town three weeks after it had been devastated.
Addressing an audience at Lloyd’s of London on Monday, Nov. 7, Van Bakel described some of the unique characteristics of the inferno that came within a whisker of engulfing Fort McMurray’s commercial district. Total insured losses of C$3.8 billion are expected, making it Canada’s most costly natural catastrophe in history, of which C$900 million is expected to fall to the Lloyd’s market. The remaining claims will probably go to local markets, of which 50 percent will be ceded to reinsurers—many of them London and Lloyd’s-based.
The loss is therefore a significant one for the industry, but one that could have been much worse, according to Van Bakel. He questioned what the magnitude could have been had Fort McMurray’s downtown commercial district been engulfed. The fact the town was experiencing a recession at the time of the disaster was another factor in reducing the overall cost of claims, as a significant number of properties were underinsured. Up to 1,000 residential properties were up for sale at the time of the wildfire.
Gas Masks and Bear Whistles
One of the biggest challenges in the first two weeks of the catastrophe was lack of information, Van Bakel told attendees. The evacuation of 88,000 residents for 30 days meant there was nobody present to provide related information. Then on May 19, the province released fire maps and photos. “Until this stage, there was a lot of misinformation,” Van Bakel said. “This imagery was really valuable in terms of triaging and starting to adjust losses and also to give residents a sense of the scale of the disaster.”
The aerial photos revealed the most adversely affected parts of Fort McMurray were the residential areas of Abasand, Beacon Hill, and Waterways. However, while most of the destruction occurred in these residential areas, some of the more costly claims came from the commercial district, where smoke and water damage were significant.
It was not until week three that loss adjusters and insurance claims professionals gained full access to the site. Crawford Global Technical Services®’ Stephen Hansen, executive general adjuster, was the first adjuster allowed on the ground in Fort McMurray and was flown in on a Canadian Armed Forces CC-130 Hercules. There was an air quality reading of 38 on a scale of one-to-ten, with smoke so thick it was difficult to see the sun on an otherwise clear day.
A series of secondary losses occurred after the fire, including properties that either exploded when the utilities were switched back on or flooded. “I have learnt that flood risk following a wildfire is a high probability because of the scarring of the land,” Van Bakel said. “We saw this in the Slave Lake fire five years ago, and it repeated itself again here.”
The smoke from the fire created its own weather system. Lightening sparked another wildfire to the north of Fort McMurray, which in the dry, warm, and windy conditions quickly spread. It eventually joined the original fire, according to Carolyn Rennie, managing director of Canada’s Catastrophe Indices and Quantification Inc. (CatIQ), who presented with Van Bakel at the seminar.
On Fire Watch
CatIQ tracked the fire from day one, recognizing its potential to develop into a full-blown catastrophe. Conditions conspired to create an almost “perfect wildfire” situation. Rennie explained that on the day the wildfire ignited, “temperatures topped 30˚C, humidity levels were below 30 percent, and wind speeds exceeded 30 knots.” This meant the 30/30/30 rule was in play.
As the fire developed, CatIQ monitored its rapid progress using multiple data sources—from satellite data and regional information from the principality for Buffalo—to social media images and webcam footage. On May 4, the firm began to map the devastation. “We mapped moderate and significantly damaged areas, created files that could be used in Google Earth, and distributed these to our members via daily email blasts,” she said.
On May 19, CatIQ declared Fort McMurray a catastrophe. “At that point, we collected all of the information we had and put together a CatIQ footprint, as well as some more refined sub-footprints of areas of total loss and significant damage,” Rennie said.
The next stage was to aggregate potential insured losses and CatIQ contacted insurers, asking them to provide CAT-related incurred loss data. On May 23, it issued an initial loss figure of C$4.4 billion. The third 90-day loss estimate issued on Sept. 12 reduced the claims tally to C$3.8 billion. Breaking this estimate down by lines of business revealed that 58 percent of claims were personal, 38 percent commercial, and 4 percent auto.
Rennie concluded by highlighting a Canadian wildfire study by CatIQ. “We examined past wildfires, looking at those larger than 200 hectares that occurred between 1980 and 2014,” she said. Pinpointing highly populated areas (10,000 inhabitants or more based on 2011 census data) within 30 kilometers of these events enabled CatIQ to create a Top 10 Vulnerable Communities (Ranked Sum) including population & largest wildfire. Alarmingly, Fort McMurray ranked 9th.
Demand Surge and Claims Inflation
Turning to claims developments resulting from the fire, Van Bakel led attendees through some of the factors that could result in claims inflation—most notably the remoteness of the community and difficulty and cost involved in bringing in building materials and skilled labor. Such demand surge inevitably drives up the cost of construction, he explained, exacerbated by a drywall tariff in Western Canada that has driven up the cost of drywall by 276 percent.
“Neighboritis” is another issue: when policyholders expect the same level of claims payouts and repairs as their neighbors. This is a situation that can be exploited by public adjusters, he warned.
Given the town’s recession, some residents are making the decision not to rebuild, a situation that can create zoning issues where there had previously been adjoining properties. However, the municipality has demonstrated it is willing to be flexible, re-zoning sites that had previously been classed as multi-dwelling to single family plots.
“At full capacity, they were building 600 new homes a year in Fort McMurray, and about 1,900 residential properties were destroyed in the fire,” Van Bakel explained. “Construction is therefore a huge challenge.”
Van Bakel told the audience that while the Lloyd’s and the London market had responded well to the challenge presented by the Fort McMurray wildfire, it missed an opportunity to be more visible in the aftermath. “From my perspective, the London market has been very responsive and very flexible—more so than many of the domestic markets, and that reflects the DNA of the London market.
“However, the domestic writers have a better advantage—because of proximity—to get the visibility factor when an event happens,” he said. This missed opportunity is one that Lloyd’s and the London market should seek to capitalize on wherever possible. “We need to harness the power of Lloyd’s and the London market in dealing with local events.”