Firestorm in Fort McMurray
In the spring of 2016, aided by high temperatures and strong winds, forest fires quickly spread out of control in the Canadian province of Alberta. It would turn out to be one of the costliest natural catastrophes in Canadian history.
The northern part of the Canadian province of Alberta experienced exceptionally high temperatures in early May 2016. The general weather pattern, featuring a flow of warm, dry air into the region from the southwest, pushed daytime temperatures over the 30 degrees mark, almost twice what was usual for that time of year. On 3 May, the thermometer nudged 33 degrees in the Fort McMurray area, with exceptionally dry conditions and relative humidity as low as 12% in some places. When a fire broke out on 1 May roughly 15 kilometres south-west of Fort McMurray in an isolated area of forest, the perfect conditions were in place for it to spread rapidly. The city is situated in the middle of a region in which the vegetation was tinder-dry due to low levels of precipitation during the winter. The danger was exacerbated by gusty winds peaking at over 70 km/h, which drove the flames on at a rate of between 40 and 50 metres per minute. On 3 May they reached Fort McMurray, destroying roughly 2,400 buildings.
Opencast mining operations at risk
The fire then moved towards northern Alberta, threatening a tar sand mining region there, before moving into the neighbouring province of Saskatchewan. In total, some 590,000 hectares were affected by the flames, equivalent to an area twice the size of Luxembourg. It was more than two months before the fire was finally brought under control on 5 July.
Initial loss estimates of up to Can$ 9bn proved wide of the mark. Nevertheless, with insured losses of between approximately Can$ 3.6bn and Can$ 4bn, the wildfires proved to be the costliest natural catastrophe in Canadian history, eclipsing even the enormous losses of the Alberta 2013 floods.
Fire probably the result of human activity
According to official sources, the cause of the devastating fire is still unknown. Lightning strikes have been ruled out. The fire was most likely the result of human activity.
With the ideal conditions, the forest fire developed its own substantial internal dynamic and “the Beast”, as it was dubbed by local people, rapidly developed into a firestorm. The incredible heat created its own weather system of pyrocumulus clouds. Air masses were driven upwards by the fire, and electrostatic discharge occurred in the smoke clouds as it does in thunderstorms. The resulting lightning bolts can trigger new fires.
In addition to the heat and dry conditions, further factors contributed to the rapid spread of the fires. The timber buildings, firewood stores and wooden fences that are typical in the region all provided perfect fuel for the flames. Many roofs were covered with wood shingles. There was also the fact that Fort McMurray had expanded considerably over the decades in tandem with the growing importance of oil sand mining, and housing had been erected without observing the required minimum distance to the forest or other areas at risk from fires. In this context, experience has shown that fire protection recommendations, such as the removal of dry pine needles and branches from housing developments and the clearing of gutters at regular intervals, are not always followed.
Although the fire only ranks fourth in Canadian history when measured in terms of its total area, it is the country’s biggest natural catastrophe in terms of assets destroyed. This is largely because of the losses in Fort McMurray, with its 80,000 or so inhabitants, where 10% of the building stock was destroyed by the flames. One person died during the evacuations.
Difficulties resuming production
There were limited losses at the oil sands open-pit mine to the north of Fort McMurray. Thanks to the fact that the fire changed direction in time, the production facilities that process and liquefy the viscous oil sand were spared. Nonetheless, the plants were shut down for roughly a month due to the evacuation of the area. Claims under business interruption policies relating to the shutdown period will in many cases fall within the range of the deductibles, or will not be triggered at all. However, some losses occurred when production restarted because bitumen from the tar sands left in the machinery had cooled down and solidified during the shutdown. The material was no longer fluid and blocked the pipeline. Given the number of flying embers and the build-up of heat, it was purely a matter of luck that the pipelines above ground and the pump stations remained operational.
The firestorm’s “digital” loss pattern is interesting from an insurance perspective. Whereas some buildings and abandoned vehicles were completely burnt out, neighbouring houses emerged largely unscathed, apart from minor damage from the heat. The explanation for this is that the heat was so intense that flying embers leapfrogged entire rows of houses, setting fire to buildings further away. Because the type of damage varied from one area to the next, case-by-case analyses had to be carried out. Total losses were identified via satellites which were able to provide images with sufficiently high resolution for this purpose. The extent to which heat and smoke had affected buildings with little external damage had to be determined on the ground.
Forest fires in Canada 1990–2015
Dangerous fire residue
The assessment of damage was delayed because the air was initially contaminated with pollutants from composite materials used in the houses and, in some cases, with toxic ash. The loss adjusters were unable to start work until the authorities had declared the region safe. Binding agents were used to stop the ash spreading further on the wind and thus prevent it contaminating a wider area.
The local population was heavily involved in repairing the damage. Many people cleaned their homes and furnishings of soot and ash themselves, forgoing possible compensation from insurance companies. In return, they expected claims to be settled quickly.
Consequences from declining oil industry
It is unclear how many of the destroyed homes will actually need to be rebuilt. Because of the slump in the price of oil over recent years, there has been a sharp decline in the importance of oil extraction from tar sands. Residents from other parts of Canada who moved to the region in more prosperous times, attracted by high salaries in the oil industry, may now turn their backs on the city. According to estimates, the population of Fort McMurray could shrink by as much as 10–15%.
The economic downturn that began with the drop in oil prices also affects compensation amounts. Property prices were in decline even before the catastrophe. According to information from the Canada Mortgage and Housing Corporation (CMHC), the average price of a detached house has fallen from Can$ 609,000 in 2014 to Can$ 504,000. If homes are not rebuilt, compensation will be paid based on the current value, which will be less than the original purchase price in many cases. Appropriate estimation of the market value is therefore likely to be a subject of debate. Among businesses, the question of compensation could also prove controversial. This not only applies to the length of the business interruption, but also the resulting loss. Hotels, for example, were struggling with lower occupancy rates even before the fires.
Increase in construction costs feared
There is further uncertainty as regards post-loss inflation. If there is a sharp, sudden increase in demand, costs of materials and labour could rise significantly. In the case of Fort McMurray, post-loss inflation will be exacerbated because the city is very remote, and transport capacity limited (transport is essentially only possible via one highway from the south). Added to this is the possibility of new legal regulations being introduced – on fire protection for example – which could drive up construction costs. These costs could increase further still if a decision is taken to boost the local economy by relying solely on local construction firms to rebuild the area, as is currently being considered.
The evacuation proceeded in an orderly manner thanks to excellent organisation. And claims management on the part of the primary insurers was also exemplary. Indeed, many companies did not wait for claims to be submitted, but instead took it into their own hands to contact customers.
Demand surge: The great unknown
Natural catastrophes with significant property damage, as in the case of Fort McMurray, frequently produce a demand surge, also known as postloss inflation. Sudden spikes in demand for building materials and the labour needed for the reconstruction of buildings and infrastructure drive up prices. The additional costs for these goods and services must be borne either by insurers or those affected by the loss. This needs to be taken into account by insurers when making forecasts relating to catastrophe losses and the reserves required.