Massive wildfires have led some major California insurers to pull back, but better models and a deeper understanding of fires can bring some relief for homeowners.
We have seen a variety of different influences that contribute to insured loss, if you will, in insurance terms, or just simply structures burned and loss of life, which is the biggest tragedy of all. First of all, we have seen very significant amounts of drought, and that has been interspersed with years of heavy precipitation. Climate scientists like to refer to that as a sharpening of the seasons: you’ll have a shortened wet season and a lot more intense rain, and you’ll have extended, long, dry seasons that have more intense temperatures. The world is a bit of an unstable system growing more extreme in both directions at the same time.
We do expect drought years to continue. Every year, it may be good—it’s hard to tell—but there will be more bad years than good continuing forward. We’ve had these mega-storms like the Camp and Woolsey fires in 2018, and in 2021 we had the Caldor Fire and the Dixie Fire. Not every year is going to be a bad year, but there is going to be a similar level of bad years as we have seen in the recent past. Forest management techniques also have a very big influence.
California’s state government has put significantly larger amounts of money into forest cleanup, underbrush cleanup, trying to clear out trees that are infected with the bark beetle, and that makes a big difference. In certain areas, there is more localized landscaping done by counties and communities, and that is definitely having an effect in the positive direction. And we’re doing more prescribed burns—the original ecosystem included fires here in California. They generally started with lightning, but that was part of the natural cycle. It’s up to us as a society to try to stay ahead of what could be, if left unattended, worse and worse years going forward.
We have a very specific view on this, and that is that wildfire and other climate-affected catastrophes have moved from being a generalist peril to being a specialist peril. Large insurance companies, primary carriers, their core competency is risk diversification and risk transfer, and they are very, very good at it. Actuarial science is an extraordinarily complicated and in-depth field with a massive amount of success over many decades and centuries. What it generally works on is perils that are fairly static, where you can use many years of loss history as a way of predicting the losses in the next year. That doesn’t work for perils that are very complicated, require very specialized skills and are changing very rapidly.
We believe it is analogous to cyber insurance. Cyber was originally part of general liability, and very quickly the primary carriers looked at it and said, “I cannot keep up with the constant war between hackers and security personnel.” Nor should they. So they broke it off, and it created a lot of space for specialty cyber insurance companies. We believe that climate-affected perils are the exact same at this point. They are much more complicated than they were before. They are changing much more rapidly. We have new behavior of wildfire popping up. That’s where Delos comes in. One of the main reasons behind us being a specialty insurance provider is that we believe that this is the only structure—a specialty insurance provider with specialty expertise built into an insurance provider itself—that will be able to solve for the coverage gap problem that we’re seeing today.
Delos is a partnership between us—the insurance entity—and an environmental think tank named Spatial Informatics Group. That group helped co-develop a few different models for Cal Fire, the California fire department. They worked on an active fire prediction model; they worked on a resource climate model; they’ve co-developed models for the Public Utilities Commission; they’ve done some work for the U.S. Forestry Service.
The use of wildfire models in the insurance industry is more recent than modeling of fire by groups that have seen this from an academic standpoint or a firefighting standpoint, etc. They’ve been doing it for much longer. They have been able to make very significant amounts of progress in terms of being able to understand what truly is exposed and what is not exposed.
At Delos, we take that information, and we fold that into insurance products. Embedded in our underwriting, in our pricing, in our aggregation management, in our PML [probable maximum loss], our work sphere, tail risk model, all of that, is the depths of the understanding from an academic standpoint: what is the science of wildfire. Our models have actually been very accurate over the last six years. A lot of the other models in the industry have not, partially because they do not have the depth and history with wildfire modeling that we do from an academic standpoint but also because there are structural aspects that are attributed to being a generalist carrier.
It starts with our ability to understand the risk of wildfire. With our models, we’ve been able to understand to a very high degree of certainty for ourselves what is the risk of each home to a wildfire loss. With that data and that confidence, we’ve been able to attract partners, specifically insurance capital capacity, that look at the data that we show them and the successful history that we have and say, “You guys are right. You understand how exposed each home is to wildfire.”
For us, we can answer the question of how exposed is each home, and then we can go into these areas and quote them insurance at a rate that makes sense for them, that is much more competitive than the other specialty groups that are out there, but also at a level that we make sure will return comfortably profitable results to our capital partners, which is incredibly important in order to continue to have those partners year over year.
We do give home hardening recommendations to the homes that we insure. We have not built it out yet, but on the road map for 2024 is a full policyholder portal that will give them a lot more detail about the risks of their property, what are the top hardening things that they can change that are personalized to their property specifically. We also want them to have all the relevant important pieces of information—what is their evacuation route if they need it, give them a feed of their local CalFire office, things like that. The reason why we started this company is we believed that we could create a financial vehicle solution, insurance, for people that are going to struggle but also to use our analytics to reduce loss. A core tenet of our company is working with homeowners to try to help them survive these types of fires.
We only sell through agents. We don’t sell direct online. That is not our strategy at all. My background is aerospace engineering. I did my master’s at Stanford in aerospace engineering and did my career in satellite-satellite imagery before starting the company in 2017. My co-founder [Shanna McIntyre], her background was physics and predictive modeling. When we got into this industry, we started building models, and we knew we wanted to build an MGA. In parallel, we wanted to learn insurance by selling it, not by studying it. We knew we were from outside the industry. Insurance is complicated. There is a lot to know.
We became licensed brokers, and we created a little brokerage that sold in small towns: Calaveras, Tuolumne, Mariposa Counties. We had that for four years before we sold it. The point was to learn, and all of that taught us very well how difficult it is for a broker or an agent that is trying to sell a policy in areas that are this impacted. We had to re-shop every client every year. That’s just too much work for a broker.
We have created our solutions for agents based on that experience. We have a broker portal that we are very proud of that we believe is the least amount of work necessary for a broker to find a policy for any non-admitted company. The first thing you do is put in an address, and no more work or information is required from the agent. It’s quote, bind, issue all right there on the portal—no human underwriting that takes a really long time to get back to you. A lot of our sales process is built around our experience as a broker, understanding that you have to help the brokers if you want to be successful in this business.