Physical Risks for Mortgage Portfolio: Wildfire

The client needed to determine the credit rating impact due to increased frequency of wildfires, impacting the value of property pledged as collateral, the Loan-to-Value (LTV) ratios, and the overall Probability of Default (PD).

Solytics developed a robust risk assessment model:

1. Segmenting the portfolio by location and risk levels to build representative mortgage portfolios.
2. Estimating Hazard Rates and Return Periods for wildfires and subsequent changes in property values under RCP 4.5 and RCP 8.5 scenarios (2°C and 4°C average temperature increase).
3. Calculating risk-to-property values under different climate scenarios and extreme events.
4. Adjusting original property values by the risk-to-property value, to arrive at revised LTV ratios.

• Enhanced credit rating assessments with wildfire risk data.
• Improved LTV ratios and PDs based on risk-adjusted property values.
• Provided a comprehensive risk management framework incorporating the impact of wildfires.