Estimate of Maximum Insurance Loss due to Bushfires

Bushfire is one of the major natural (and man made) disasters in Australia due to a combination of dense bush/grass land coverage, dry weather and less logging. Recent bushfire events include the Black Saturday fire in Victoria in 2009 and the Canberra fire in 2003. In both cases, many human lives were lost and insurance losses were hundreds of millions of dollars or more. In this paper, we report on the application of Extreme Value Analysis (EVA) to estimate 50-year and 100-year return levels of insurable bushfires losses. Both the Generalised Extreme Value model and the Generalised Pareto Distribution model were applied to a logarithm-transformed dataset of past claims of only 14 years. A sensitivity analysis was also conducted to test the robustness of the model fitting. To supplement the EVA work, past fire weather conditions for a study area were analysed and used in simulations to illustrate the damage that might occur due to fires initiated by the electricity distribution network on high fire danger days. The simulated fires burnt through various terrain asset classes including native forest, cropping lands and urban areas. The spatial vegetation and land cover information were acquired based on 2001 and 2003 datasets. The total burnt area for each asset class was calculated for each fire using a GIS on an hourly basis for the first four hours after ignitions. The per-hectare valuations for each asset class were used to establish an estimate of the total maximum potential insurance claim for each simulated bushfire. The scale of these total claims was in keeping with the return levels estimated by the EVA. Future work now underway will extend the simulation approach and embed it within a quantitative risk model for estimating maximum foreseeable losses from fires started by electricity distribution networks.