This document discusses the growing costs and impacts of wildfires globally and mechanisms for effective risk transfer. Over the past decade, wildfire occurrences and costs have increased substantially around the world. Currently, a large portion of wildfire costs are uninsured, placing a significant burden on public finances. The document outlines various sources of financial capital that have emerged to cover insurance risk and gives examples of public sector disaster risk financing programs. It also compares indemnity and parametric insurance products and provides recent examples of parametric covers. In closing, it discusses challenges for parametric wildfire solutions and the impacts of climate change in exacerbating wildfire risks.

1. PARIS, 17 JANUARY, 2020
Matthew Eagle
Head of Model Solutions and Advisory
Ruth Lux
Head of Public Sector, EMEA
EFFECTIVE RISK TRANSFER MECHANISMS
OECD WILDFIRE CONFERENCE

2. 2GUY CARPENTER
Marsh & McLennan Companies at a Glance
We are four businesses with one purpose:
Helping our clients meet the challenges of our time
*Preliminary estimate based on 2018 results
Clients in more than
130 countries
148-year history of
leadership and innovation
Over 75,000
colleagues globally
Combined annual revenue
of $17 billion*
One of the Fortune
250 companies

3. 3GUY CARPENTER
Growing Impact of Wildfire Damage
Source: EM-DAT
Decade Continent No. of
Occurrences
Total
Deaths
Injuries Affected Homeless Total
Affected
Total
damage
('000 US$)
1980-2019
Africa 30 335 570 64,288 24,088 88,946 860,000
Americas 151 477 1,640 1,623,416 68,172 1,693,228 72,075,300
Asia 67 841 1,030 3,629,366 88,285 3,718,681 13,412,500
Europe 112 748 4,012 1,309,225 11,815 1,325,052 14,052,631
Oceania 34 304 1,141 75,071 13,773 89,985 3,553,494
Total 394 2,705 8,393 6,701,366 206,133 6,915,892 103,953,925

4. 4GUY CARPENTER
Wildfire – what are the associated costs?
Area Detail Where do costs fall?
Risk Mitigation Prevention, clearing, maintaining
firebreaks, monitoring, planning
National/ regional/ local government
Live Event
Response
Emergency Services: protecting
population and property, evacuations
and communications
National/ regional/ local government
Physical
Assets
• Homes
• Commercial and Industrial
• Government Assets
Varies by country – often covered through
insurance where insurance take-up high
but may be explicitly excluded
Life • Deaths
• Accidents and Health
Some coverage from insurance
Economic
Disruption
Business Interruption (BI)
Public Service disruption
Tourism
Agricultural Output
BI sometimes covered by insurance
Much of the broader economic impact falls
back to economy at large
Liability Cause of fires Utilities and their insurers

5. 5GUY CARPENTER
Protection Gap
An Unwelcome Fiscal Burden
This places a significant burden on public balance sheets at a time when it is least welcome
Source: Swiss Re Institute
Insured losses Uninsured losses 10-year moving average insured losses 10-year moving average economic losses
Insured vs. uninsured losses, 1970-2018, in USD BN at 2018 prices
500
450
400
350
300
250
200
150
100
50
0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

6. 6GUY CARPENTER
Sources of Financial Capital
Over the last 10 years new sources of capital have covered insurance risk as a diversified asset class
Estimated Dedicated Reinsurance Sector Capital – 2012 to 2019 (USD Billions)

7. 7GUY CARPENTER
Public sector disaster risk financing has gained more traction
Guy Carpenter leaders and experts have been personally involved in more than 90% of all public sector catastrophe
risk-transfer schemes, globally, supporting governments in a consultative process from a conceptual stage to
implementation and ongoing administration
CCR
France
IERP
Indonesia
FONDEN
Mexico
NNPP
Norway
PAID
Romania
FLOOD RE
UK
CEA
USA - California
CCRIF
Caribbean
12 Pools
USA
NFIP
USA
CWF
USA - California
TCIP
Turkey
MAIPARK,
Indonesia
TREIF
Taiwan
SEADRIF
Southeast
Asia
MCIP
Morocco
 Schemes with standalone products managed by a central organization (e.g. NZ EQC, TCIP, PAID)
 Government schemes where Nat Cat cover is provided as an ‘add-on’ to a standard fire policy (e.g. TRIEF, CEA, JER)
 Government backed insurance pooling schemes (e.g. Conscorcio, FONDEN, CCRIF, CCR)
 Private insurance pooling schemes, sometimes supported by government legislation (e.g. NNPP, Swiss Elemental Pool)

8. 8GUY CARPENTER
Flood Re
UK Flood
“Statement
of Principles
agreed”
Rapid
and significant
increases in
the pricing of the
flood risk
Ongoing issues
unresolved for
uninsured/
self insured
“Statement
of Principles
ended”
Memorandum
of understanding
for Flood
Re agreed
Flood Re
development
Flood Re
“Go-Live”
July 2008 June 2013 April 2016
1st Flood Re
Quinquennial
Review
2021
Transition to risk
reflective pricing.
Flood Re closes
20392014-2016
Flood Re Timeline
How the Scheme Works Income
 Risk Premium set by Council Tax
Band deliberately below risk
reflective pricing
 Levy 1 paid by all insurers writing
household business in proportion to
their market share and currently set
at £180m annually
 Levy 2 available in extreme
circumstances to allow Flood Re to
address capital or liquidity issues
Flood Re Purpose
Flood Re’s purpose is to promote and enable the availability and affordability of flood insurance for eligible homes and manage over its
lifetime the transition to an affordable market for household flood insurance where prices reflect the risks of flooding
Source: Flood Re

9. 9GUY CARPENTER
California Earthquake Authority (CEA)
United States (Wildfire)
California Wildfire
 Due to increasing severity, California utilities were facing immense liabilities as the government imposes
strict liability. Notably, one declared chapter 11, leaving the government to pick up the bill
o Increasing difficulty in obtaining coverage
 The state put into place a $21 BN wildfire fund split between utility customers and shareholders. This is
meant to act as a second insurance policy for publicly traded electricity companies and offset immense
liabilities (Marsh placing primary, GC placing FAC)
 The law takes $10.5 BN from electricity customers through charge on monthly bills. Utilities joined by
paying a sum respective to their market share
WILDFIRE LOSSES
BY THE NUMBERS
A GROWING GLOBAL RISK
2010–2016
Average $1 BN/year
2017 = $13 BN
2018 = $13 BN
AGGREGATE
RETENTION
WILDFIRE FUND
& UTILITY
PARTNER #1
WILDFIRE FUND
& UTILITY
PARTNER #2

10. 10GUY CARPENTER
Types of financial coverage: Indemnity vs Parametric
Cost Detail Advantages Disadvantages
Indemnity Indemnify policyholders for
their incurred loss
• Replaces actual loss
• Reinstate
• Loss adjustment process
can take time
Industry
Loss
• Leverage published
industry loss estimates
• CS (USA) and PERILS
AG (EU/TR/AUS…)
• No need to show
individual policy indemnity
• Industry loss does reflect
actual impact of the event
• Need to wait for industry
estimate to settle at
stable figures
• Accept basis risk as
incurred loss may not be
proportional to industry
loss
Modelled
Loss
Use a modelled loss as the
trigger
• Relatively quick once
event parameters and
footprints available
• Basis risk - Modelled
loss may not reflect
actual loss
Parametric Variety of event parameters
used to define
• Fast pay-out to make
funds available
• More transparent
• Efficient, automatable
• Basis risk - aim to
minimise through
modelling and analysis
• Regulatory hurdles
• Accounting treatment
• Perceived as
sophisticated

11. 11GUY CARPENTER
The Danish Red Cross and International Federation of Red Cross and Crescent
Societies inaugural Volcano Catastrophe Bond – structured using a parametric trigger. This
supports its ability to make funding available to assist with the humanitarian response to a
volcanic eruption
Philippines Government - $390m of parametric cover against EQ and Typhoon to support
rebuilding and recovery efforts
FONDEN S.A., Mexico – use a combination of parametric and indemnity
Caribbean Catastrophe Risk Insurance Facility – offer parametric solutions to countries in
Caribbean and Central America
Africa Risk Capacity – offer parametric drought protection to a number of African countries
Morocco Solidarity Fund – has just purchased a $275m parametric EQ protection
• SJNK for Japan Flood
• QOMPLX and Chaucer – offering SME’s Business Interruption protection against Cyber and Terrorism
• AXA – FastCat parametric
• GC - QuakeCube
Direct products
Recent Examples of Parametric

12. 12GUY CARPENTER
Challenges and Opportunities for Parametric Solutions Wildfire
A simple metric would be total burnt area
Often tracked by local authorities
Satellite and other data is used to monitor
burn areas
However large areas can burn with
minimal loss to property or life
Could refine by selecting the area of
interest to be at the urban/forest interface
Could base the trigger on total number of
properties destroyed/damaged
Requires an independent and reliable
source of damage incidents
Use fire-fighting costs relative to average
• Requires some historic data on previous
fire-fighting costs
• Reporting agent should be transparent
and independent
• Need to know the data will be available
during or soon after an event
Parametric
Solutions
Wildfire

13. 13GUY CARPENTER
Australia Wildfires 2019/2020
Source: Landgate's MyFireWatch. A map from researchers in Western
Australia shows wildfire hotspots across the nation as of 1 January 2020.
 Has burnt over 8.4m hectares across country (~ 450,000 in
2009 fires)
 25 deaths (the 2009 fires killed 173 people)
 Approximately 2,000 properties destroyed with others
damaged
 ICA – estimated insurance loss of AUD 1.34bn as at 14th
January
 Moody’s Analytics – Economic damage is likely to exceed
the record AUD $4.4bn set by 2009’s Black Saturday
blazes
 Previously bushfires tended only to hurt the local
economies directly in the path
 Impacts on consumer confidence, increased air
pollution and direct harm to industries such as
farming and tourism
 Risk of broader macroeconomic spill-overs this
season - due to scale, still early in season
Source: NSW Rural Fire Service , VicEmergency, SA CFS. Bushfire burn
perimeters for New South Wales, Victoria and South Australia as of 9=8 January
2020.

14. 14GUY CARPENTER
Wildfires and Climate Change
Mean Temperature Departures from 1981 – 2010 Average
(Source: NOAA)

15. 15GUY CARPENTER
Wildfires and Climate Change
Climate change predicted to impact wildfire more in the mid-latitudes
(Source: Moritz et al)

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