A Conversation With Howard Kunst
Knowing the wildfire risk of a home is becoming increasingly important — both for homeowners and insurers. However, it is insufficient to simply know that there is a probability of a wildfire occurring at a certain property. It is imperative to understand the development of historic risks into current risks and how this score will evolve in the future. After all, low risk today does not mean no risk tomorrow.
While only about 9% of U.S. properties meet the threshold for high or extreme wildfire risk, it is worth questioning why wildfires are creating increasingly large damage figures for homeowners and insurers. In short, climate change, where homes are built, and their construction type all play a role.
However, that is not the full story.
Understanding how risk scores are created, what a property’s risk score actually means, and knowing how to promote mitigation — even among homes that qualify as low risk — are essential strategies for maintaining safety in environments that are experiencing prolonged and more frequent wildfire seasons than usual.
In this episode, host Maiclaire Bolton Smith sits down with CoreLogic Chief Actuary Howard Kunst to talk about wildfire risk, how to use a risk score to map those potential threats, and what different actions insurers can take based on the score.
Understand Your Wildfire Risk
In this Episode:
2:14 – How do we calculate wildfire risk?
3:25 – How are these scores used and why are they different than probabilistic models?
7:04 – How long is a risk score valid, and why is it wise to annually evaluate risk scores across a property portfolio?
8:52 – What are the thresholds for low, medium and high risk? Why are nearly all U.S. properties low risk?
12:08 – Erika Stanley goes over the numbers in the property market with The Sip.
13:15 – Why are low-risk areas like Maui, Hawaii seeing wildfire events that cause widespread devastation?
Up Next
Can Wildfire Mitigation Stop the California Insurer Exodus?
Howard Kunst:
Yep. That’s exactly it. I think what I’d also say is the percent of wildfires that are manmade has gone up in the 11 years that I’ve been here. The other part of that is not only are there more structures and more exposure to be damaged in these fires, there’s more people in those areas that could even potentially cause fires. So it’s kind of a double whammy.
Maiclaire Bolton Smith:
Welcome back to Core Conversations: A CoreLogic Podcast where we tour the property market to investigate how economics, climate change, governmental policy, and technology affect everyday life. I am your host Maiclaire Bolton Smith, and I’m just as curious as you are about everything that happens in our industry. Wildfire season is in full swing, and due to climate change, U.S. states that are already vulnerable to wildfires are seeing increased losses. Additionally, areas that have historically not experienced a lot of wildfire activity are seeing devastating wildfire losses. Add to this, the appearance of El Niño, which brings warmer, drier weather to the U.S. and Canada, and this season is primed for wildfire activity.
But not all homes in wildfire vulnerable-regions are created equally. So depending on the location of the house, the wildfire risk may be lower than a house that’s just a few miles away. So how can you know what the home’s risk profile is? Is it possible to determine whether a low risk home is still vulnerable and to what degree? So, to talk about wildfire risk and what the losses could look like for the 2023 season, we invited CoreLogic’s Chief Actuary Howard Kunst. Howard, welcome to Core Conversations.
HK:
Thank you, Maiclaire. Happy to be here to talk about one of my favorite subjects.
MBS:
One of your favorite subjects, and you and I work really closely together, and this is the first time you’ve ever been here. So I’m excited to get to chat with you about this.
Erika Stanley:
Before we talk about wildfire risk, I wanted to remind our listeners that we want to help you keep pace with the property market. To make it easy, we curate the latest insight and analysis for you on our social media where you can find us using the handle @CoreLogic on Facebook and LinkedIn or @CoreLogicInc on X, formerly known as Twitter, and Instagram. But now let’s get back to Maiclaire and Howard.
MBS:
Let’s just start talking about wildfire risk. We’ve had a number of podcasts. We’ve talked about different aspects of wildfire risk, but from just the basis calculation of risk, how do we compute or calculate wildfire risk?
HK:
It really comes down to the two steps. The first step is we look at all the vegetation and grids across the United States and assess the vulnerability of those grids. And it depends on the species of vegetation that’s in there and how dense it is. So we look at that information and a number of different characteristics that go into the assessment of those grids. Then ultimately what it comes down to is for any structure in a wildfire state, what does this proximate to that risk? Obviously, the closer you are to the risk, or if you are right inside of high risk, your score is going to be very high. And as you move farther away from the vegetation and that high risk, you become less susceptible to winds blowing embers, which is the majority of where the damage comes from wildfires. So the farther away from that risk you get, the lower your score goes.
MBS:
Okay. So we’re talking about risk scores. How exactly is a risk score used and who uses it? So, if we’re thinking all of our listeners here, is this something that the average homeowner would use or have or is it primarily different industries? Who’s using these risk scores?
HK:
The primary user are the insurance companies, and initially the wildfire risk score was used predominantly for underwriting and risk selection. Depending on how the risk appetite was of an individual homeowner’s insurer, they would choose how to use the score and what different underwriting actions they would take based on the score. Again, we have a great deal of variation in how they use the score relative to underwriting. But as they became more comfortable with the score and the validation we do that shows the differential in risk from a low score up to an extreme, they’re also now able to use that information to help them rate the policies to set what the prices are using some of the validation we do, and also using our probabilistic wildfire models to calibrate, we’re able to provide information to help them determine what the various rate level differences are for the risk.
MBS:
Okay. You mentioned probabilistic models. I know in a previous podcast, we did talk about how probabilistic models are used versus risk scores, but I want to just clarify that a little bit here as well. Can you just talk a little bit about who would use a risk score versus who would use a probabilistic model and how they’re used together or separately?
HK:
The scores are really useful in a homogenous type book of business, like homeowner’s. The things that you’re doing, what you’re writing is very similar across your book of business, and the scores are very easily used within a standard underwriting system and can just be very easily integrated into a system for underwriting or for pricing. But when you get into more complex structures that you want to know differences based on some of the building characteristics or large commercial structures, the probabilistic models provide you that extra information of what can happen and what the various loss levels are.
The other part that kind of gets mixed in there is within risk management, and when we talk about risk management, that’s just understanding what your concentrations of risks are, where you have them. You can use the risk scores for that, but you can also use the probabilistic models to estimate areas that have a high concentration of where those events can be, and you can understand what are those rare events that impact large numbers of structures and ultimately a higher loss for those events.
MBS:
Almost more of a portfolio view where the risks are.
HK:
Yeah, a portfolio view, finding those areas that could ultimately have very significant lost dollars in the event or in a year.
MBS:
Right. Understanding of broader risk differentiation across a portfolio.
HK:
Yep.
ES:
If you’re curious to hear more about wildfire risk scores and probabilistic models as well as how property data can help manage the California insurance crisis, tune into Episode 70. That was released on August 16.
MBS:
Okay. If we are looking at risk scores specifically, you see your score, it’s 20, it’s 80. How long is that score valid?
HK:
Well, unfortunately, because of growth of vegetation, the score can change a little bit. But normally we keep the vegetation, to understand what the fuel loads are updated every year, sometimes even quarterly. So the scores are good for a year. Most companies will pull a score every year, and they can change significantly if there’s a fire or if there’s been a new subdivision put in that a lot of vegetation has been cleared, that would reduce the score. There are things that happen that can change the score downward in a year to year. So we always recommend that insurance companies review the wildfire risk score every year at the date of the policy.
MBS:
And in areas where we do see big devastating fires, we would then update the model so that they reflect the current state?
HK:
Yes. The good news is we also keep in our meta files what that old score was, what the high risk ultimately can be. We know when the vegetation grows back, most insurance companies and most people still want to know what that long-term risk level is, and it will go down from a fire, but it will go back up in a few years to back where it was.
MBS:
Gotcha. Okay. So it’s something that we provide both scores to our clients?
HK:
Correct.
MBS:
Okay. Let’s talk a little bit more about these risk scores. You kind of alluded to the fact that it’s a range. So let’s talk a little bit about the range. How would we translate something as this is low risk, this is medium risk, this is high risk, this is extreme risk? How would we define each of those categories?
HK:
Well, we’ve done a lot of validation in the model, and we can see, other than with some of the extreme events that have happened recently, that generally speaking, like a location with the risk score of 50 or below, rarely if ever, has any impact. So that’s what we would consider low risk. And across the states that we have wildfire risk score in, the low risk locations account for about 91% of all locations in those states.
MBS:
Okay. Wow. That’s a lot.
HK:
It varies by state, obviously.
MBS:
Yeah. So then what would we see would be the medium, high, extreme risk?
HK:
So we see about 2% is in the moderate, and then about 3.5% would be what we could call a high risk. And another 3.5% would be what we call the extreme risk. Extreme risk would be scores 81 to 100.
MBS:
So really, it is a relatively small number of properties that are in these very high and extreme risk areas. Yet, I know that we see a lot of fires that burn, and they’re not just burning the high risk areas. They’re not just burning these areas that are high or extreme. Obviously, the probability or the likelihood of something happening to those areas is potentially a lot higher, but low risk doesn’t mean no risk.
This is something I’ve talked a lot on this podcast, buying a new home. When we were looking for a new home, we did move to Southern California, in areas that are very high risk wildfire. I looked at a number of properties that I’m like, “I’m not living there because you can see the vegetation just growing right near it.” And I just knew that it would be higher risk. The house that we did end up buying, I ran our wildfire risk score, and we have a risk score of 22, so it is very low, relatively speaking. And maybe six weeks, two months after we moved into this house, there was a wildfire three blocks from our house. So that was my firsthand look of low risk doesn’t mean no risk.
Fortunately, with that event, it was contained very quickly. It is pretty much in the heart of the city here, but there was one home that sustained some damage. Fortunately, not much more than that. And it really came down to the people had propane tanks in their backyard and embers hit them. So from a personal awareness, mitigation, preparedness, things that you can do, that’s something like how can you be aware of your surroundings and what can happen to help you make sure your property is as safe as possible?
ES:
It’s that time again. Grab a cup of coffee or your favorite beverage. We’re going to do the numbers in the housing market. Here’s what you need to know. Housing prices are beginning to rebound. Nationally, home prices increased by 2.5% year over year in July. In looking ahead, the CoreLogic HPI Forecast indicates that home prices will increase by 3.5% from July 2023 to July 2024. Nevertheless, the anticipated continuation of higher mortgage rates has weighed down price increase forecasts over the next year. This is especially true in less affordable markets. However, the extreme inventory shortage of the western U.S. may offset this pressure. Speaking of the West, Arizona, California, Colorado, Idaho, Montana, Nevada, Oregon, Texas, Utah, Washington, and Wyoming all saw annual declines in home prices. Meanwhile, on the East Coast, Vermont, New Hampshire, and New Jersey all saw the highest year-over-year increases in home prices. The city of Miami continues to lead the pack, posting 9% year-over-year gains. That’s The Sip. See you next time.
MBS:
Let’s talk about how… Well, first of all, there may be an area like in Santa Rosa and Paradise where the overall area may be really high risk, but there are certain areas that have lower risk and how they may still burn. And then maybe even moving into what happened in Maui, how we had an area that was relatively low risk in a place that we have not heard or seen fires in many years and become just devastated. So yeah, can you kind of talk about all of that?
HK:
Sure. I think what we see happening recently in some of the events that you mentioned is we’ve seen extreme wind and we know we model and we know that the embers from wildfires can blow into areas. And sometimes in the past we’ve seen them fly, if I recall the numbers, sometimes a half mile or more. But they generally don’t fly that far. But what we’ve seen also happening with these high wind events is that all it takes is for one structure to start on fire, and then it becomes an urban conflagration. And it’s not the wildfire that’s spreading. It’s a house is burning and then it’s spreading to the neighbor’s house, and it just keeps going and going and going. It’s house to house.
The proximate cause is still the wildfire, but it’s really an urban conflagration event that’s caused by the wildfire. So it’s a very extreme situation within the wildfire hazard, and that’s what we’ve been seeing. The other part of that is, even though, as we mentioned, these homes may not be high risk, they may be low or moderate risk, we’re still seeing a lot more… In the Western states, we’re seeing more and more homes being built in these higher risk areas or adjacent to these higher risk areas. So just the number of potential structures that could be damaged in these events, even if they are relatively low risk, are still there and closer to harm’s way than homes were in the past.
MBS:
Right. We’ve talked a lot on this podcast in different episodes on the wildland-urban interface, the WUI as it’s known, and it’s the fact that those are the areas where people are building all of these new homes because that’s the only place where there’s still land to build homes in a lot of the cities, especially in California. It’s those areas that are pretty high to extreme risk, and that’s where they’re building a lot of homes, which is contributing to us seeing more and more fires in these areas.
HK:
Yep. That’s exactly it. I think what I’d also say is the percent of wildfires that are man-made has gone up in the 11 years that I’ve been here. The other part of that is not only are there more structures and more exposure to be damaged in these fires, there’s more people in those areas that could even potentially cause fires. So it’s kind of a double whammy.
MBS:
Yeah. I think in the social media age that we’re in right now, I mean, one of these large fires that happened a few years ago was started by a gender reveal and somebody threw flames up into the air and that started a wildfire. I think we’re starting to see more and more things like that that are happening that, to your point, 10 years ago, we didn’t really see events being started like that.
HK:
Yep, exactly.
MBS:
Okay. So I guess, is it safe to say, even though a place like my house, which has a risk score of 22, is it fair to say that even in low risk areas, there’s always some level of risk always?
HK:
Yeah, that’s exactly it. And we’re seeing that. Again, the issue about low risk does not mean no risk is more than just wildfire. This really applies to many of the hazards that we talk about. And I always use the example of flood. When a flood happens, it’ll start in the areas of high risk that are lower elevation. As the flood waters rise, they impact areas that are lower risk. So in the a hundred year events, you’re seeing the waters rise to a level that they only get to 1% of the time. You will continue to see, as these events get worse, like a flood event, for example, the water’s getting higher and higher, which is impacting lower risk areas. It’s the same thing with wildfires is generally the fires will pretty much always start in vegetation that is high risk. As they get bigger with winds and other forces that are happening, they will spread into lower risk areas. That’s just the nature of natural catastrophes. That’s what they are.
ES:
Maiclaire and Howard spent this episode talking about wildfire risk, how it’s calculated, and how it’s evolving. In next week’s episode, the conversation will continue as they talk about the role mitigation plays in reducing wildfire risk and how climate change is influencing wildfires. See you there.
MBS:
All right. Thank you for listening. I hope you’ve enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcast to be notified when new episodes are released. Thanks to the team for helping bring this podcast to life. Producer, Jessi Devenyns; editor and sound engineer, Romie Aromin; our facts guru, Erika Stanley; and social media duo, Sarah Buck and Makaila Brooks. Tune in next time for another Core Conversation.
ES:
You still there? Well, thanks for sticking around. Are you curious to know a little bit more about our guest today? Well, Howard Kunst is the Chief Actuary at CoreLogic. He works on the Science and Analytics Team, and he provides a variety of analytical services to the insurance industry and other clients. He also provides market and industry insights in support of product development, sales, marketing, and thought leadership. You can find him speaking at various conferences throughout the U.S. Find out where he’ll be next by reaching out to our team at [email protected].
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