partner login

BMS News

California Wildfires October 2019

What Is The Concern For The Insurance Industry?
Like clockwork, it’s wildfire season again in California, and it appears to have the insurance industry on edge for good reason. The last two years have been extremely destructive, with insured losses reaching over $30B and, according to Milliman, wiping out about twice the combined underwriting profits for homeowners insurance for the past 26 years. Applications like Zillow make it easy to understand exposures within fire parameters, and some of the properties’ high insured values are likely eye-opening, undoubtedly worrying the insurance industry.

BMS iVison shows the USGS GeoMac Current Fire Perimeter and can show in-force risks. Other free tools like Zillow allow for cross-reference to understand risk.

However, I want to first say that, so far, the fires of the last month have caused nowhere near the level of destruction to the industry that was experienced in 2017 and 2018. Headlines like the one below are simply causing unnecessary panic. There is a huge difference between the number of structures exposed versus structures that burn.

Overall statistics from the last two California wildfire seasons suggest this year is not even in the same ballpark in terms of loss and structures destroyed.

In fact, of the current wildfires reported by CAL FIRE, only 242 structures have been destroyed, as compared to the thousands that occurred in 2017 and 2018. I guarantee that this number will climb as the assessment continues. A large fire that wipes out thousands of homes could, of course, still occur this season. But, in my opinion, the industry needs to take a deep breath and trust that the last week has been a buildup to something less extreme at the start of November. Unfortunately, the true end to the fire season is a long time from now, and I don’t see any rain in the forecast for at least the next 10 days. Lastly, we can’t underestimate the amazing work that firefighting crews are doing to try and contain these fires before any more serious damage occurs. For example, the Misty Fire near Oroville, CA was quickly attended to yesterday with air and ground support minutes after it started. These efforts limit insured loss.


New Normal of Forced Power Outages
Although the insured loss level has been relatively low, there are many issues for the insurance industry to consider. The power outages have been massive. In fact, PowerOutage.US confirmed that this is likely the largest forced outage in U.S. history, with close to 3 million people without power at one point. At a time when we are more dependent on electricity than ever – ATMs can’t operate, restaurants are closed and businesses try to limp along on backup generators – there is no doubt that these unprecedented outages are causing huge economic losses. I have seen reports that the economic costs are anywhere from $400M up to $3B, with the caveat that economic losses are complex to understand. Another important aspect of determining insurance loss is that California policies may include a “Loss of Use” provision, which would cover for hotel stays during evacuations. How many insureds are utilizing such coverage is unknown at this time, however. Regardless, this might mean an uptick in such coverage going forward. There is clearly business interruption that could also lead to increased losses.


The power outages could also cause an even greater insured loss because they complicate evacuation. Without lights to find the things they need, along with street lights and stoplights to guide them out of the evacuation zone, evacuees are helplessly gathering their belongings by flashlight and trying to leave via streets that are at a higher risk for accidents due to no traffic lights. One accident can often shutter some of the only exits out of these towns, creating the potential for an even larger loss of life from fast-moving wildfires. First responders are also challenged by the power outages.


Another issue with a lack of power is increased crime. Without video cameras or street lights to hinder criminal activity, the opportunity for insured losses due to crime is escalated. Further, a lack of power can lead to loss if towns can’t pump water. Clearly, this creates problems when trying to fight fires, but it also causes dangerous situations for businesses and residents not having access to water. Evacuation plans and supplies are critical to businesses and residents in locations that have a high earthquake likelihood in addition to wildfire potential.


Is No Trash Pick-Up Next?
Much of the focus has been on the problems endured by utility companies, but other industries are facing huge liability risks as well. A few weeks ago in southern California, a garbage truck caught fire and the driver dumped the burning trash on the side of the road (protocol to do so to save the truck). Minutes later, powerful winds blew the flames across a hillside and into a mobile home community, killing two people and destroying dozens of homes. This is another example of unforeseen risk that may be addressed by limiting trash pick-up during extreme conditions.


Evacuation Fatigue
The vast majority of evacuees will not be affected by the fires and can return to their homes without consequence. Taking a lesson from hurricane evacuation as we mark the seventh anniversary of Hurricane Sandy 2012, however, is that evacuation fatigue is real. During Sandy, many people didn’t leave because, in the prior year during Hurricane Irene 2011, calls for evacuation were ordered, but the storm weakened with limited impact to the Northeast. Some of the evacuees chose not to leave the next year only to find them themselves suffering from the impact of Sandy. I am sure evacuation fatigue is already setting in for many California residents, and unfortunately, this could cause more problems in the future as people wait longer to leave, causing major traffic jams. The fallout could be deadly.


Season Is Not Done Yet
In summary, even though it currently appears that the insured loss will be limited, the overall risk will remain high until, hopefully, a weather system around the middle of November will bring some much-needed precipitation to the west coast of the U.S. The early December fires of 2017 that totaled over $2.5B in insured losses serve as a reminder that the California wildfire season is not yet close to being done. With any luck, however, the recent events will have been the peak of the season’s activity. The insurance industry and California residents are on edge, and the forced power outages could get worse – even with massive outages, two of the major fires were caused by utility lines that were not de-energized. These outages are having large economic impacts and, to some degree, will be felt by the insurance industry going forward. On a positive note, however, they could also provide an opportunity for the development of new products to help mitigate the loss of power without physical loss to a structure.

BMS Tropical Update Oct 17th 10:00 am CDT

With each passing day in October, the chance of a U.S. landfalling named storm decreases.  In fact, since 1900, only 16 named storms have made landfall in the U.S. after October 17, but that also means that a large loss to the insurance industry is still possible.  In fact, the late fall can have some devastating storms, such as Hurricane Sandy.  While Sandy was not technically a hurricane at landfall, it still caused close to $20 Billion of insured loss.  Some storms can form rather rapidly at this time of year.  It took Hurricane Michael (October 7-10, 2018) just three days to go from a tropical depression to a Category 5 hurricane.

Historically, the majority of landfalls occurring late in the season are along the Gulf Coast, with the overwhelming majority of these being along the Florida Gulf Coast.  Some of these landfalling storms have been significant, such as Hurricane Wilma in 2005, but none of the long-range forecast models (out to October 27th) currently suggest any type of tropical trouble like Wilma, which originated from an African wave.  Tropical development from African waves become rare once the season passes the middle of October, as the Intertropical Convergence Zone (ITCZ) shifts south towards the equator and overall wind shear begins to increase across the Atlantic Basin.  This is why Tropical Depression Fifteen quickly lost its organized structure earlier this week and failed to intensify into a tropical storm off the African coastline.

In the late season, tropical troubles often arise from what is called a Central American gyre, and this is currently what the National Hurricane Center (NHC) is watching off the coast of Mexico.  This Central American gyre is a broad area of low pressure over parts of southeastern Mexico and Central America that extends into the Bay of Campeche and the adjacent east Pacific Ocean, and is typical of the late spring and early fall hemispheric weather patterns.  In fact, roughly 50% of Central American gyres have a tropical cyclone associated with them, according to Philippe Papin, a research scientist at the U.S. Naval Research Laboratory. 

As you can see from the tweet above, these Central American gyres tend to form smaller areas of low pressure, and sometimes they form on the eastern side of the gyre and rotate counterclockwise around the larger circulation.  These pieces of energy can detach from the overall gyre circulation and become independent tropical systems. 

For the last several days now, the forecast models have consistently shown that a piece of the Central American gyre will move into the western Gulf of Mexico over the next 72 hours.  If this occurs, the NHC could designate a tropical or subtropical depression or storm once it has a complete, counterclockwise surface circulation with organized thunderstorms nearby.  If it becomes a tropical/subtropical storm, it would be called Nestor.  The NHC is currently forecasting a 90% chance of tropical cyclone development.

The forecast models suggest that the system will quickly track toward the northern Gulf Coast by Saturday, and then may track inland to bring much-needed rain to areas of the southeast.  After all, the last thing the insurance industry needs is a surprise wildfire event across the southeast this fall like the one that occurred in Gatlinburg, TN in 2016.  Also as a reminder, the area where Hurricane Michael made landfall had a large amount of tree fall which will increase the wildfire risk for several years.

The flash drought continues to impact the southeastern U.S. with both above-normal temperatures and below-normal precipitation.  This will drastically change with the forecast of a wet weekend as tropical moisture makes its way across the region.

As the tropical system takes shape, it will stay weak as increasing upper-level winds over the northern Gulf of Mexico should produce enough wind shear to prevent anything of substantial strength to develop.  It’s safe to say that the insurance industry shouldn’t see a repeat of a rapidly strengthening storm like Michael last year. Currently the intensity, track, closely resembles Tropical Storm Josephine in 1996 which was a PCS loss event.  It formed in the west-central Gulf, tracked toward the northeast, and made landfall in Florida’s Big Bend area which is especially sensitive to storm surge.

Above is the model forecasted guidance from the America GFS ensemble model and the various intensity forecast models.  U.S. landfall impacts are expected to occur on Saturday, October 19 around 48 hours from now. Source TropicalTidbits.com

Overall, the long-range forecast continues to show a North American weather pattern that is not conducive for tropical named storm development or U.S. landfalls, as the polar jet begins to take over the weather pattern across North America and increases wind shear over much of the Tropical Atlantic Basin.  However, let’s not forget that the season continues until November 30. 

Since 1966:  83% of Atlantic seasons have had one or more named storms; 64% have had one or more hurricanes; and 21% have had one or more major (Category 3+) hurricanes; form after October 15, but the chance of U.S. landfall decreases with every passing day.

BMS announces completion of BCI and PCP investment

BMS Group, (“BMS”), the independent specialist (re)insurance broker, today announced the completion of the significant equity investment by affiliates of British Columbia Investment Management Corporation (“BCI”) and Preservation Capital Partners (“PCP”) first announced in June. All required regulatory approvals have been secured.

Management and staff of BMS maintain a significant shareholding in the company and CEO Nick Cook and the executive management team remain unchanged. Representatives from BCI and PCP have now joined the BMS board.

BMS has continued to expand its capabilities, with over 140  significant broking, analytical and actuarial hires in the past 18 months including: Nick Moss (Global FD, JLT Re); Pete Chandler (Deputy CEO US reinsurance, JLT Re); James Chicken (director, Price Forbes & Partners); Gregg Holtmeier (managing director North American casualty, Guy Carpenter); Neil Prior (Chief Executive, Priority Underwriting); and Clare Whitlam (senior vice president, actuary, JLT Re). This expansion is set to gather pace following completion.

Nick Cook commented: “With BMS’s long-term future as an independent broker secured, BMS is poised for strong profitable growth. With the capital strength of BCI and PCP behind us, we are expanding in the North American reinsurance market and other high growth specialty and emerging risk lines that consistently generate strong performance. BMS has become the alternative broker of choice, with a full suite of analytical and actuarial capabilities to rival and, in some areas, exceed those of the world’s biggest broking firms, making it an attractive home for the industry’s leading talent.

“This major investment is a ringing endorsement of the London market and its continued leading role in the world’s insurance markets. I am convinced that our strategic partnership with BCI and PCP will be the gold standard for long-term investment in global wholesale and reinsurance broking for years to come.”

BMS were advised by Canaccord Genuity.

About BMS

BMS Group is a leading independent specialist insurance broker with teams of experts in the fields of reinsurance, wholesale and direct insurance. For 38 years, BMS has provided comprehensive, customised solutions in the fields of wholesale, reinsurance and direct insurance, and capital advisory. Today, this experience and expertise, served with a spirit of creativity, allows BMS to offer a full range of integrated services. Designing individual, tailored solutions makes BMS the risk and capital management advisor clients want to work with time and again.

For more information about BMS please visit www.bmsgroup.com

About BCI

With C$153.4 billion of managed assets, British Columbia Investment Management Corporation (BCI) is a leading provider of investment management services to British Columbia’s public sector and one of Canada’s largest asset managers. We generate the investment returns that help our institutional clients build a financially secure future. With our global outlook, we seek investment opportunities that convert savings into productive capital that will meet our clients’ risk/return requirements over time. We invest across a range of asset classes: fixed income; mortgages; public and private equity; real estate; infrastructure; and renewable resources.

For more information about BCI, please visit www.bci.ca

About PCP

Preservation Capital Partners (PCP) is a private equity firm specialising in the financial services sector. It focuses on partnering with market-leading companies with proven and resilient business models that have demonstrated strong growth. PCP has been one of the most active investors in the specialty insurance distribution market over the last few years having made investments in Ascent Underwriting, Cove Program and Bay Risk Services.

For more information about PCP, please visit www.preservationcp.com