The Victoria bushfires that wiped out entire swaths of Australia’s most densely populated state defied expectations and could cost local insurers close to AU$800 million.
Although local experts say the insurance industry could absorb the losses without any significant market dislocation, the focus now is understanding why last weekend’s fires became so destructive so quickly.
“This fire’s behavior has been different than normally expected,” says Russell Blong, Ph.D. and member of Aon Benfield’s UCL Hazard Research Centre. “The extreme temperatures and the heat wave [prior to the fires] may have had some effect. Whether it had an impact on fire behavior is an interesting question.”
The fires that began last week in Victoria has so far claimed 750 homes and 181 deaths, and both statistics are expected to rise significantly, according to published reports. Initial estimates of both property/casualty and life insurance losses are tentative, and range from $AU600 to $AU800 million.
Many local carriers have been aggressive in cementing their catastrophe reinsurance cover as the result of Australia’s continual exposure to natural disasters, says Stuart Alexander, a partner with Deloitte in Sydney.
“We’ve had historically had flooding in the north and fires in the south so catastrophe cover needs to be reinstated yearly and closely watched,” Alexander says. “Most [carriers] have well developed reinsurance programs and many have cover in place to a level that is appropriate.”
The Australian insurance industry overall produced a combined ratio of 94 percent for 2008, according to the latest J.P. Morgan Deloitte General Insurance Industry Survey.
Bushfires are a common natural hazard in Australia, but the fires that continue to threaten homes in Victoria this week are the worst in decades and have created several questions for catastrophe researchers, says Blong.
“More homes were burnt in this fire and efforts to protect homes from ember attack were less effective,” Blong says.
Ember attack is when leaves and twigs burnt as the result of a bushfire become airborne in high winds and spread the conflagration to nearby homes and other structures.
Blong added that after the Ash Wednesday fires of the early 1980’s the Australian government endorsed a plan that would allow well-bodied individuals to defend their homes against ember attack. Those who could not defend their homes would need to leave the area early.
However, that practice may come under review following this week’s fire.
“What has surprised me during this fire is the number of people killed in cars,” Blong added. “Does that mean they were caught by not leaving early or staying and defending? There are important questions.”
Blong added that it could be several months before researchers and government officials come to any conclusions or change existing practices to prevent losses.
“Over the years there has been a number of building regulations put it place to contain bushfires, including cutting back the bush, making sure vegetation was away from the structure and closing areas under the home,” Blong says. “Whether people were ignoring these regulations or this fire was different, we may not know that for a year.”