Stout has been retained by investor-owned utility (IOU) companies to evaluate the financial risk associated with wildfires and to quantify the associated potential damage levels.

Client Challenge

The increased frequency and heightened media focus on mega-fires and climate change has adversely affected IOUs nationwide, including those in lower-risk regions. Insurance carriers are increasingly focused on raising premiums and constraining coverage due to utility-related wildfires. Consequently, insurance constraints are trending negatively for IOUs.

Unless an IOU performs a financial risk analysis, in addition to operational reviews and mitigation strategy implementations, it may be missing the bigger picture and real risk within its service territories. This includes making informed decisions regarding insurance options and focusing on mitigation strategies in the higher-risk areas.

Conducting a financial liability risk analysis that quantifies wildfire risks within the IOU’s various service territories is a critical step for IOUs to manage risk and make informed decisions.

Stout’s Solution

By combining our claims and damages expertise, use of advanced GIS and mapping software, and research on economic impacts of historical wildfire activity, we provided an assessment of the IOU’s wildfire risk in its service area.

We performed extensive research on historical wildfires in the IOU’s service area as well as its respective state and comparable areas, examining wildfire cause (specifically, if the wildfire was utility driven) and associated damages (suppression costs, property damage, business interruption, loss of life, etc.). This included time series wildfire trends as well as meteorological conditions.

Then, we overlayed the Wildfire Burn Probability and Severity Risk levels over the IOU’s service area using advanced GIS and mapping software. Additionally, we overlayed historical burn perimeters to understand wildfire experience within the IOU’s service area.

Utilizing this historical wildfire activity and the other wildfire and mapping datasets, we developed a robust statistical model to estimate the annual maximum probable and maximum foreseeable damage amounts associated with the IOU’s wildfire exposure. We also ran additional scenarios to account for potential adverse climate change impacts and to stress test exposure levels if an unprecedented extreme wildfire occurred.

Project Obstacles

Since many IOUs operate in low-risk areas and have experienced no utility-caused wildfires for many years, we expanded our search into comparable regions for additional data points, identifying the wildfires, their causes, and the associated damage amounts. However, limited data in certain states imposed constraints on our statistical analysis.

Additionally, one IOU operates a clean energy generation facility in a higher-risk state, connected to the main grid via a transmission line. We conducted an additional risk analysis focused on areas along the transmission line and researched historical wildfire data spanning the past 100 years.

Results Achieved

We successfully completed our analyses, presenting our analyses and findings to multiple IOUs’ management, who incorporated the findings into a comprehensive corporate wildfire mitigation assessment. Management then used these assessments to help with business decision making and insurance renewals.

We also presented our analysis to an IOU’s casualty insurer market, including more than a dozen carriers, supporting the IOU’s position that its existing wildfire risks are appropriate to its insurance coverage.