For the insurance industry, the threat of massive and profoundly destructive wildfires poses a significant and immediate problem. Big wildfires didn’t become big by insurance standards until 2016, and insurers don’t yet have the tools in place to manage the risk. Size is only part of the problem — size by surprise is the real issue. One solution could be parametric insurance. This niche form of protection has gained relative popularity in regions where major perils have made it difficult for insurers to provide full protection. It’s simple and highly effective — insurers know how much they’re going to pay out, customers know how much they’re going to get, and the conditions for when payments are made are clear.
The fires raging in the Los Angeles area could cause as much as $250 billion in economic damage and become one of the worst natural catastrophes the United States has experienced. That is roughly what Hurricane Katrina caused in economic losses (adjusted for inflation). According to AccuWeather Chief Meteorologist Jonathan Porter, total losses from the fire could approach 4% of California’s GDP.
