Australian bushfire: quantifying and pricing the risk to residential properties

A new analysis of bushfire risk to residential properties shows that in 60% of years losses occur somewhere in Australia. The evident corollary to this is that in 40% of years no losses are experienced. This statistic has remained reasonably stable over the last century despite large increases in population and improvements in technology and firefighting resources. This stability was similarly demonstrated by the 40% probability of a major event, here arbitrarily defined as the loss of more than 25 homes within a period of 7 days, a time window of some relevance to reinsurance contracts. The annual average number of houses lost is estimated to be 83 homes and when this is combined with current asset values for home and contents, the Annual Average Damage is valued at $33.5 million. The 1 in 100 year event equates to a likely loss of AU$0.7 billion and the 1 in 250 year event, AU$1.1 billion. These figures are approximately equal to the present value of the insured losses from Tropical Cyclone Tracy and the Newcastle earthquake. When the Annual Average Damage is adjusted for the annual volatility of losses, as would typically be the case when risk is judged from a reinsurance perspective, the national bushfire risk premium amounts to $62.4 million. A complete costing for bushfire would need to include loss of life, the fixed cost of maintaining and supporting state fire fighting services, the opportunity cost of the volunteers engaged in firefighting activities as well as any contributions from Federal Government. This same general approach could be easily adapted to other perils in order to establish an objective ranking of the threat posed by the various natural hazards.