Wildfires are emerging as a risk on par with hurricanes when it comes to economic impact, according to Karen Clark, founder of catastrophe modeling firm Karen Clark and Co. (KCC).
Speaking about recent developments in wildfire risk analysis, Clark said that recent models show wildfires can now produce loss scenarios comparable in scale to hurricane events.
“A couple of years ago, when KCC released our first wildfire model, it showed insurers that there were large-loss scenarios in the tail of their loss distributions from wildfires that were comparable to hurricane losses,” Clark said in a report from the Royal Gazette.
That assessment has gained renewed attention as Bermuda-based insurers and reinsurers anticipate gross claims approaching US$10 billion related to the January wildfires in California. The losses reflect the growing financial impact of wildfire events in the United States, which are influenced by both environmental conditions and rising property values.
The use of wildfire-specific risk tools is expanding across the reinsurance sector. Firms have begun integrating granular property-level data – such as vegetation proximity, topography, and structure spacing – into models to refine pricing and improve loss projections.
Clark noted that the core driver behind rising wildfire losses is the increase in exposure, with more homes being built in high-risk areas and construction costs pushing insured values upward. “The main driver is increasing exposure – that is more properties being built in harm’s way and in many cases are more expensive,” she said.
She added that construction costs have significantly increased over the past decade. “An interesting statistic; you know, if you take the same single-family home in the US, the cost to build that today is twice as much as it was 10 years ago.”
Firefighting efforts have also shifted in response to these challenges. Clark explained that fire crews now prioritize areas with defensible mitigation measures. “First of all these LA fires were very high-wind events … firefighters are trying to make real-time decisions as to which homes they're going to try to save; they’re going to naturally look at areas where there is good mitigation and they’re most likely to be successful.”
She added that the effectiveness of mitigation depends on more than individual efforts. “Community-level mitigation, or neighborhood mitigation, is just as important as mitigating your own home.”
Advances in modeling technology are playing a growing role in insurers’ approach to wildfire risk. Clark said insurers are now able to incorporate machine learning techniques to update catastrophe models almost in real time, providing more dynamic insights for underwriting and pricing.
As annual wildfire losses rise, insurers are increasingly adopting these tools to improve risk selection and support premium adequacy. For Bermuda-based reinsurers, this environment presents both a challenge and an opportunity to expand offerings in wildfire reinsurance.
Bermuda’s reinsurance market is expected to bear approximately one-third of the insured losses tied to the January 2025 California wildfires. This could contribute to a projected 4-point increase in combined ratios for Bermuda reinsurers in the current underwriting year.
Despite this pressure, many of these companies maintain global portfolios that could offset the regional impact of the California losses.
Clark said the use of advanced modeling paired with neighborhood-scale mitigation strategies may be key in distinguishing resilient communities from those more vulnerable to recurring catastrophe.
What are your thoughts on this story? Please feel free to share your comments below.
