It has become almost impossible to pull up the news on your phone and not see a headline story about wildfires. This natural catastrophe category is setting records for the number of hectares burned.
On average, the world loses approximately seven million hectares a year to wildfire. As of August 2023, Canada alone has lost. As wildfires spread, this poses a significant risk to construction projects.
The construction sector needs to start paying closer attention to the wildfire risk in construction, given the massive growth in wildfires in 2023 and the number of wildfires impacting highly populated areas (areas with construction projects). Some construction project types are more exposed to wildfire risk than others — for instance, linear projects like transmission lines, pipelines, highways and transit systems. Another class of construction project type that is highly exposed to wildfire risk is wood frame construction, especially since this type of construction is seeing massive growth given a global drive towards more sustainable construction.
Assessing the Impact on Your Business
In addition to various project types that are more exposed, construction stakeholders need to strongly assess their organization’s risk to the non-damage delay impacts of wildfires. For instance, the risk that your operations will be shut down due to an evacuation order or even due to sound judgement like shutting down operations when human life is at risk. Evacuation risk causing operational shutdowns has cost construction stakeholders substantially as wildfires start migrating closer and closer to populous areas.
Wildfire Risk and the Construction Sector
During the wildfires in Fort McMurray back in 2016, many construction companies had substantial business interruptions that were not triggered by damage to their own property. Instead, they were forced to leave their projects by evacuation orders, or they chose to leave their operations to protect human lives. This risk will only grow as we see the wildfire risk grow.
Another area of impact that should be assessed and treated is the impact of wildfire on the supply chain. Much of the construction sector’s materials come from national and international sources. The growing wildfire risk and evacuations can have a tremendous impact on the supply chain, thus creating business interruption exposures to construction projects.
Identifying the Right Solutions
Construction stakeholders need to identify and implement risk management solutions to prepare for this fast-growing wildfire risk. There are many risk controls in the market to manage this risk, but with massive wildfires, the risk control category is facing extreme challenges solving for this risk, and thus, you need to ensure your risk finance strategy for wildfire is sound. Traditional property coverage capacity for this peril is receding at a rapid pace, and coverage for non-damage losses, as referenced above, is very difficult to obtain, especially in areas prone to wildfire. To manage this risk effectively, you have to look at two risk finance options:
- Risk Retention Strategies. Ensuring your organization has adequate capacity to fund wildfire risk via your balance sheet, via project contingency funds (or organizational contingency funds) and via a formal premium charge out within your captive insurance vehicle.
- Parametric Insurance. This form of risk financing is triggered when a specific event occurs, and it pays out a set amount based on the magnitude of that event. Traditional insurance will pay out to the magnitude of the loss suffered (provided the peril is covered under the policy). Parametric coverage is fast and precise and can bring capacity to the table to fund risks even when damage does not occur (non-damage business interruption). Some examples of parametric insurance include triggers when rainfall exceeds a specific amount, triggers for temperatures exceeding or falling below a specific amount, and triggers when wind speed exceeds or doesn’t exceed a specific speed.
How Parametric Insurance Can Protect Your Project
Retention strategies are straightforward — start building retention potential for wildfire risk into your operations and your projects. The parametric insurance opportunity is something that requires more explanation. Though parametric insurance has been around for a while, it has largely been used for precipitation, temperature, wind, run of river and sunlight parameters.
Now, through using NASA and National Geological Survey satellite data, parametric insurance coverage can be utilized for wildfire risk. The coverage utilizes satellite imagery pixelation as the parameter to validate or invalidate the payout. Further, the severity of a wildfire event can also be determined through this imagery, bringing forward another level of the parametric trigger. Several global insurers are offering this coverage to their clients, and given it is a parametric trigger, you can strategically identify the areas geographically you would like to have the coverage for and enact the coverage for the prescribed duration. Of interest, the coverage can be as in the tens of meters size (i.e., 30 square meter sections of land).
As the protection gap for natural catastrophes continues to grow due to lost capacity in the traditional property insurance market, you need to investigate some of these alternative risk control and risk finance solutions to protect your organization from these growing risks. The construction sector has always had massive fire risk exposure, and the growth in wildfires only adds to that exposure. When you consider the risk that whole sections of a city could be destroyed by wildfire and construction contractors could have several ongoing projects in specific parts of the city, you can understand how devastating this risk could be to construction stakeholders. Do your homework on parametric insurance cover for wildfire, as it could end up saving your organization from a company-killing event.
Questions? Contact:
David Bowcott
Managing Director, Construction and Infrastructure Group, NFP
100 King Street, Suite 5140 | Toronto, Ontario M5X 1E1
Cell: 416.566.5973 | david.bowcott@nfp.com