More than 2,400 properties have already been lost to Canada’s record-breaking Fort McMurray wildfire, but the cost of living expenses for those evacuated are the big unknown which may rapidly escalate the cost of the event to the insurance industry.

This week saw the publication of the first publicly available modelled insured loss estimate for the fire, with AIR Worldwide revealing it expects the industry to face a bill of between C$4.4bn ($3.4bn) and C$9bn.

This estimate marks the wildfire as a significant insured event for a number of reasons.

First, the wildfire has become the costliest insured loss event in Canada’s history. Second, the event will also become the largest insured loss on record to result from a wildfire, surpassing the 1991 Oakland Fire in California.

Ahead of the official start of the 2016 Atlantic hurricane season next month, the wildfire has also become the costliest insured event of the year to date.

One of the notable factors about AIR’s loss estimate is the wide range it covers, with the top end of the potential insured damage bill more than double the bottom end of the range.

The loss will predominantly be driven by homeowner claims, and the uncertainty over the size of the damage bill is driven by the potential cost of additional living expenses, a component of Canadian homeowners' insurance that is likely to drive major payouts because of the unprecedented nature of the Fort McMurray wildfire.

Increasing risk

For many years, the risk of wildfire damage to property has been increasing. This has largely been driven by increased movement of human populations into regions in the close vicinity of forests.

Tammy Viggato, a scientist at AIR Worldwide specialising in wildfire risk, says the number of people moving into the area where forest meets human populations – known as the wilderness urban interface – is one of the drivers of the Fort McMurray loss event.

“The boreal forest in Northern Alberta has experienced large wildfires in the past, but the population living in this area wasn’t as high,” Viggato tells Insurance Day.

“One reason why we have a perceived increase in wildfire risk isn’t that the number of wildfires are increasing, it is that more people are moving into the wilderness urban interface. When there is a population influx into a region that has experienced large wildfires historically, we expect there will be risk to that exposure.”

For some years, commentators have warned of the potential for destruction owing to the rise in property development in the interface.

For the most part, blazing wildfires have created spectacular images and localised damage, but until now, insured losses in excess of $1bn have been limited.

Before this month, 1991’s Oakland Fire in California was the costliest on record, with an insured damage bill of approximately $1.8bn recorded at the time. Swiss Re estimates the Oakland Fire would cost around $2.9bn at today’s values.

With the third-largest forest area in the world, Canada has considerable potential for wildfires, particularly in the north of the country.

This year’s weather conditions have exacerbated the risk. According to research provided by Munich Re, the affected region has experienced an extreme warm period in recent months, with average temperatures for January to March 3°C higher than the long-term average.

“This has resulted in very early snow melt and drying of the ground,” a spokesman for the re­insurer says.

This is indicative of what can be expected in the future, according to Munich Re.

“The increased frequencies of above-normal temperatures are most probably linked with global warming. There is no indication that the current situation has been affected by the still-active El Niño phase, as in previous years with strong El Niños neither the frequency nor the losses have been unusual,” the spokesman says.

“Scientific studies based on climate modelling imply that climate change in the future will lead to less snow pack and more extreme dryness, particularly in southwest Canada. Global warming increases the fire hazard in many regions of Canada and will result in a longer fire season,” the spokesman says.

Unusually large

Even taking into account factors such as increasing development close to forests and the impact of weather conditions, the Fort McMurray fires are still an unusually large insured loss event.

“Canada is a massive country, and to have that much exposed value in the wilds of Canada is quite an exception,” explains Toronto-based Paul Cutbush, senior vice president for catastrophe management at Aon Benfield Analytics.

Cutbush says the accumulation of values in Fort McMurray can be attributed to the oil boom and resultant rapid development of oil sands in the region.

Oil sands, which first emerged as a potential energy source in the late 1970s, took off during the subsequent oil boom and triggered mass migration of Canadians into the Fort McMurray area.

Surrounded by forests, the development of the settlement was arguably one of the worst possible scenarios in terms of wildfire risk, Cutbush says.

But with around 10% of Canada’s economy dependent on oil and gas, the accumulation of values in the region grew.

Now, Cutbush estimates the value of exposures in Fort McMurray to be between C$25bn and C$30bn.

With the region’s economy heavily dependent on oil sands production, any damage to facilities from the wildfire will also have a bearing on the insured impact.

As yet, the oil sands facilities have not suffered physical damage from the wildfire although production has been halted for the past two weeks.

The cost of business interruption to the energy sector, as well as any potential physical damage to facilities, is not included in AIR’s C$4.4bn to C$9bn estimate.

At present, the loss is expected to be dominated by residential property damage. Damage to facilities would also trigger losses for onshore energy insurers.

“There are 11 oil sands facilities within 75 km of Fort McMurray so there could be some business interruption issues emerging,” Cutbush says. A report from the Conference Board of Canada suggests this has meant the loss of 1.2 million barrels of oil a day, equivalent to C$763m of production.

Hopes of resuming production in the coming week were dashed as the fire began to move closer to the facilities, prompting the evacuation of thousands of residents of camps housing oil sands workers in the region.

One of these evacuated camps was consumed by the fire on Tuesday, with 665 sleeping units lost to the blaze.

The unprecedented scale of the evacuation resulting from the Fort McMurray wildfire is the cause of the biggest unknown when estimating the insured impact of the event.

Additional living expenses (ALE) are included as part of homeowner coverage in Canada, and will be a major driver of the total insured loss bill from the Fort McMurray event.

“It's not just the cost of the 2,400 homes destroyed by the fire – no one in Fort McMurray can gain access to their homes,” Cutbush says.

An estimated 88,000 people have been evacuated as a result of the fires, and with the fire still burning, water contaminated and air pollution at unsafe levels, it is not yet clear when many of them will be able to return.

“This means people have to rent. They also cannot prepare food, and cannot do their own laundry, all of which brings additional costs,” he says.

As a result, homeowner policies will see claims from the wildfire even if the property itself has not experienced physical damage. The total cost of this to the insurance industry will be determined by the ALE terms included within policies, and how rigorously enforced these are given the crisis facing residents.

“Some companies only have an ALE coverage period of 15 days, some have 30 days. There are also likely to be deductibles on policies. However, we’ve heard insurance companies are waving deductibles for ALE, and extending the indemnity period,” Cutbush says.

Many firms already have mobile teams set up on the ground to distribute payments to help policyholders cope.

International markets

The largest residential property insurer in Alberta is Intact Financial, which wrote roughly C$425.5m of direct property premiums in the province in 2015. Intact has said it expects losses of between C$130m and C$160m from the wildfire, with the remainder passed to reinsurers through its catastrophe programme.

RSA Canada, which wrote C$170.9m of direct property premiums in Alberta last year, has said its loss will be capped at around C$70m with the remainder covered by its reinsurance.

Major reinsurers contacted by Insurance Day say it is too early to estimate their likely losses, given the event is still developing and the uncertainty surrounding many components of the final damage bill.

Munich Re has traditionally held a significant presence in Canada, and generated more than €4bn of reinsurance gross written premiums from the country in 2015. In contrast, Swiss Re’s Canadian business wrote $385m of non-life premiums in Canada last year.

Cutbush says there is no domestic reinsurance market aside from branches of international firms, with much of the Canadian catastrophe businesses placed internationally for perils other than wildfire, such as earthquake.

“Everything is reinsured inter­nationally,” he says. “Wildfire is generally considered less of a threat than other perils such as flood and earthquake in terms of economic and insured risk in Canada.

 “At the moment, the British Columbia earthquake puts Canada on the map in terms of catastrophe cover. There is an insurance take-up rate of around 60%, compared with the 10% that buy earthquake insurance in California. We place C$22bn to C$23bn of reinsurance capacity for earthquake.”

Argenta Research says it has spoken to underwriters at Lloyd’s syndicates who are also cautious about quantifying the loss with the fires still burning.

“A common theme concerns decisions to cut back Canadian exposure since 2011, owing to inadequate pricing. Thus, initial comments from underwriters are along the lines that the losses are ‘manageable’ or ‘irritating’, rather than ‘major’ or ‘worse’, but accompanied by suitable caveats,” Argenta says in its latest quarterly report to the market.

Given the abundant capital in the reinsurance market at present, and benign catastrophe loss environment of the past five years, even a loss at the C$9bn end of AIR’s estimate range would make only a limited dent in the industry’s finances.

With the fire still burning and thousands still unable to return home, it will likely take many months before an accurate estimate of the total insured damage bill emerges.

Once the situation is safe enough for some residents to return, the immediate next steps will be to get local hospital and police facilities back up and running.

“To open Fort McMurray up again, these need to be in place,” Cutbush says. “Fort McMurray has been a fairly unique situation, with so much accumulation of value and population in such a remote area.

“I don’t know if we’ll ever see something like that again,” he adds.