With the Government of China’s proposed Energy Efficiency Regulations (GB40411-2007), the implementation of external insulation systems will be mandatory in China. The frequent external insulation system fires cause huge numbers of casualties and extensive property damage and have rapidly become a new hot issue in construction evacuation safety in China. This study attempts to reconstruct an actual fire scene and propose a quantitative risk assessment method for upward insulation system fires using thermal analysis tests and large eddy simulations (using the Fire Dynamics Simulator (FDS) software). Firstly, the pyrolysis and combustion characteristics of Extruded polystyrene board (XPS panel), such as ignition temperature, combustion heat, limiting oxygen index, thermogravimetric analysis and thermal radiation analysis were studied experimentally. Based on these experimental data, large eddy simulation was then applied to reconstruct insulation system fires. The results show that upward insulation system fires could be accurately reconstructed by using thermal analysis test and large eddy simulation. The spread of insulation material system fires in the vertical direction is faster than that in the horizontal direction. Moreover, we also find that there is a possibility of flashover in enclosures caused by insulation system fires as the smoke temperature exceeds 600 °C. The simulation methods and experimental results obtained in this paper could provide valuable references for fire evacuation, hazard assessment and fire resistant construction design studies.