USA — The United States’ past two wildfire seasons have been the most severe on record, and larger fires are expected to be more frequent, A.M. Best notes in a special report. “Annual wildfire catastrophe losses have averaged more than US$1 billion this decade after adjusting for inflation, based on figures from ISO’s Property Claim Services unit,” A.M. Best reports in ‘Wildfire Losses Set to Increase Industry’s Catastrophe Woes,’ posted online. “After nearly US$2 billion in claims from the Southern California wildfires in 2007, the insurance industry faces the prospect of another rough wildfire season and escalating losses in the years to come,” the report notes. Thus far in 2008, a 10-square-mile fire in Big Sur, California has destroyed more than 20 homes and caused the evacuation of more than 800 residents. In Canada, wildfires in Kelowna, B.C. in 2003 resulted in 3,385 claims totaling Cdn$200 million. At that time, it was largest property loss event in Canada following the 1998 Ice Storm. Previous wildfire catastrophes have not incurred any specific financial ratings actions, although that could change, A.M. Best says. “A.M. Best does foresee instances where more prevalent wildfire losses in tandem with other catastrophe losses could pressure insurers’ balance sheets,” the ratings agency says. One way U.S. insurers have limited the damage, A.M. Best notes, is to refine their guaranteed replacement cost (GRC) policies. Under GRC policies, insurers guarantee replacement of the home even if the cost to do so exceeds the homeowner’s policy limits. “Major carriers have been able to reduce claims costs because of a change in policy language introduced in the mid-1990s from guaranteed replacement cost to extended replacement cost coverage,” the special report notes. “As a result, more homeowners have found that total loss claims payments have not kept pace with rebuilding costs, leading to complaints and lawsuits.” Extended replacement cost policies institute a percentage cap on replacement costs exceeding policy limits. Even though many wildfires do not classify technically as “catastrophes,” they nevertheless entail several consequences that test an insurer’s bottom line, A.M. Best notes. “Wildfire events do not always meet the US$25-million loss threshold to be declared a catastrophe,” the report notes. “Yet some insurers’ costs are rising from expenses to track and settle claims, litigation costs and from adjusted living expenses related to mandatory evacuation orders.” More insurers are declining to underwrite homes located in canyon areas or on hillsides exposed to dry vegetation and trees, the ratings agency adds. A.M. Best’s report notes the warmer temperatures on the West Coast have made the wildfire season last about two months longer than usual.