Canada: Fort McMurray Fire Loss Update: The "Beast" – Its Cost To The Insurance Industry And The Need For Greater Risk Management

Fort McMurray, Alberta is a northern urban community within the Regional Municipality of Wood Buffalo. It is situated in the middle of the Athabasca oil sands and is nestled in a valley surrounded by boreal forest. With a population of 125,032 urban and rural permanent and shadow residents,[1] Fort McMurray has played a significant role in the development of Canada's petroleum industry.

After a relatively dry winter and warm spring, on May 1, 2016, a wildfire began burning southwest of Fort McMurray. On May 3, 2016, the Alberta Government declared a provincial state of emergency for the Regional Municipality of Wood Buffalo. By this time, the wildfire was out of control as it swept through the community causing the mass evacuation of 88,000 people;[2] the largest wildfire evacuation in Alberta's history.[3]

The wildfire, dubbed the "Beast" by Regional Fire Chief Darby Allen, consumed approximately 2,400 homes and buildings, completely devastating some businesses and neighbourhoods. Despite the heroic efforts of thousands of firefighters and volunteers, over the following weeks the wildfire rapidly spread across northern Alberta and Saskatchewan, consuming over 590,000 hectares of forested area, negatively impacting Athabasca oil sands operations by causing plant shutdowns, before being declared under control on July 5, 2016.[4] The Beast, the costliest natural catastrophe in Canadian history, is not expected to be fully extinguished until the summer of 2017.[5]

Three days after the evacuation of Fort McMurray and surrounding areas, A.M. Best Company Inc. released a report predicting that the Alberta wildfire "will likely have significantly more losses than the Slave Lake Fire in May 2011."[6] The Slave Lake fire resulted in insured losses of more than C$700 million, with the largest insured wildfire loss in Alberta prior to that being the 2011 Richardson fire which cost C$350-450 million (property damage and lost revenues to CNRL's Horizon Plant).[7] Until 2013, the Slave Lake fire ranked second (behind the Quebec ice storm of 1998 at C$1.86 billion) on the list of Canada's most expensive natural disasters, by insured losses. In 2013, the floods affecting southern Alberta caused about C$1.86 billion in insured losses, while a July 8, 2013, rainstorm in the Toronto area caused about C$850 million in insured losses.[8]

On July 7, 2016, two days after the wildfire was declared to be under control, the Insurance Bureau of Canada reported the northern Alberta wildfire to be the costliest insured natural disaster in Canadian history. Catastrophe Indices and Quantification Inc. (CatIQ) has estimated insured property damage at C$3.58 billion (5 times larger than Slave Lake losses)[9] with 62% of the losses attributable to personal property, 33% to commercial property, and 5% auto.[10] This figure also includes business interruption claims, which cover oilsands companies forced to shut down mining and streaming operations. CatIQ reported more than 27,000 personal insurance claims with an average claim value of C$81,000, 5,000 commercial claims averaging C$227,000, and 12,000 auto claims averaging C$15,000 per claim.[11]

The magnitude of the insured losses from the Fort McMurray wildfire will be felt for some time, serving as a sharp reminder of how costly such natural disasters can be for the insurance industry. If insurers are going to continue to write property and casualty insurance covering natural disasters occurring in locations of high risk (7 out of 10 of the most expensive Canadian catastrophes have occurred in Alberta),[12] insurers will need to focus on developing and implementing robust risk management practices, focusing on:

  1. development of tools and programs to accurately assess the risk of fire loss in areas that are more prone to wildfires;
  2. partnerships with government agencies and other stakeholders to promote improved land use practices and adequate resources for wildfire management; and
  3. education of policy holders on specific actions that can be taken to best manage property exposed to wildfire loss.

Although the investigation has not concluded, human activity is strongly suspected as the cause of the devastating Fort McMurray wildfire. While this particular wildfire may have had a human origin, insurers in Canada are becoming increasingly concerned about a growing vulnerability to wildfire damage due to climate change, which change has brought about warmer, drier weather resulting in drought like conditions. Additionally, climate change has caused an increasing prevalence of lightning strikes and windy conditions, particularly in the western provinces. To further compound the risk of climate change, there is a growing propensity to develop communities ever closer to heavily forested areas.

In support of the proposition that climate change is increasing the risk of wildfire, consideration must be given to the fact that at the start of the Fort McMurray wildfire, an unusually hot, dry air mass was in place over northern Alberta which brought record setting temperatures of 32.8°C, accompanied by relative humidity of 12% and wind gusts of over 72 km/h. Such extreme climate conditions dramatically increased the risk of this wildfire and, in fact, such conditions were instrumental in its rapid spread. Further, given that Fort McMurray is situated within the boreal forest, this wildfire seemed to have a limitless supply of fuel.

The last major wildfire that occurred in Canada prior to 2003 was the 1989 Manitoba Fires consisting of 1,147 wildfires in central and northern Manitoba, causing the evacuation of 24,500 people and destroying over 100 homes.[13] Since 1989, there have been 5 major wildfires resulting in significant insured losses. These include the 2003 Okanagan Mountain Park fire, the 2009 West Kelowna wildfires, the 2011 Slave Lake wildfire, the 2011 Richardson fire and the 2016 Fort McMurray wildfire. It is clear that with the increased prevalence of wildfires within the last decade, insurers need to be diligent in ensuring that vigorous risk management steps are undertaken now to mitigate wildfire losses that are sure to arise again in the not too distant future.

Footnotes

[1] Alberta Government, "2015 Municipal Affairs Population List," Alberta Municipal Affairs, ISBN 978-1-4601-2630-1

[2] As reported on Twitter by the Regional Municipality of Wood Buffalo, May 4, 2016, #ymmfire.

[3] Parsons, Paige, "Thousands flee from Fort McMurray Wildfire in the Largest Fire Evacuation in Alberta's History," Edmonton Journal (May 3, 2016).

[4] "Fort McMurray wildfire now considered under control," July 5, 2016, CBC News, http://www.cbc.ca/news/canada/edmonton/fort-mcmurray-wildfire-now-considered-under-control-1.3664947

[5] Ibid

[6] "Alberta Wildfires May Be the Costliest Catastrophe Ever for Canadian P/C Industry," A.M. Best (May 6, 2016)

[7] "Canadian Natural Resources Limited Provides a Further Update in the Impact of the Alberta Forest Fires," Marketwire (May 31, 2011)

[8] Supra note vi

[9] "Northern Alberta Wildfire Costliest Insured Natural Disaster in Canadian History – Estimate of insured losses:$3.58 billion," Insurance Bureau of Canada, (May 7, 2016) http://www.ibc.ca/on/resources/media-centre/media-releases/northern-alberta-wildfire-costliest-insured-natural-disaster-in-canadian-history

[10] "Nearly $3.6 billion in insured losses from Fort McMurray wildfire: CatIQ," Canadian Underwriter (July 7, 2016), http://www.canadianunderwriter.ca/catastrophes/nearly-3-6-billion-insured-losses-fort-mcmurray-wildfire-catiq-1004096018/

[11] Supra, note ix

[12] G. Morgan, "A whopping $3.58 billion: Fort McMurray fires the costliest event ever for Canadian Insurers," Financial Post (July 7, 2016)

[13] "A chronological overview of the 1989 fire season in Manitoba" 1991. Hirsch, K.G. Forestry Chronicle 67(4): 358-365

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