Revealed – the key to offsetting wildfire risk?

New report introduces groundbreaking solution

Revealed – the key to offsetting wildfire risk?

Insurance News

By Ryan Smith

Willis Towers Watson and The Nature Conservancy (TNC) have published a report that demonstrates how ecological forest management – which reduces the risk of severe wildfires – can be combined with insurance and significantly cut insurance costs.

Researchers at TNC and Willis Towers Watson were able to quantify insurance premium savings by modelling the impact on insurance of controlled burning and the thinning of overgrown forests. Those insurance savings could, in turn, be used to fund further investments in sustainable forest management.

According to the report, the practice known as ecological forestry – which includes prescribed burns and the removal of smaller trees and other vegetation in overgrown forests – leads to a 41% decrease in total insurance premiums for homes and a range of reductions for commercial property, while also reducing the likelihood of extreme wildfires.

The insurance savings from ecological forestry could be applied to pay debt service on bonds which would be issued to pay for further ecological forest treatment, creating a “virtuous circle,” according to the report.

For the first time, the project tested parametric insurance as applied to the intensity and acreage of wildfires. That test also found a reduction in both losses and premiums, the report found. A parametric product, which can provide instant access to funds to pay for costs not covered by indemnity insurance, would be new to the market, Willis Towers Watson said.

The report examined an ecological forest restoration project in the watershed of Placer County Water Agency in California’s Tahoe National Forest. The researchers found that ecological forestry in the watershed reduced the risk of wildfire substantially for the 81,000 homes in the area – which, in turn, could cut aggregate home insurance premiums by $21 million a year.

“For the first time, we are demonstrating that insurance modelling and pricing can account for the severe wildfire risk reduction benefit of ecological forest treatment,” said Dave Jones, senior director of environmental risk at TNC and former California insurance commissioner. “These widely supported forest treatment practices – prescribed burning and ecological thinning – provide the triple benefit of improving forest health, decreasing the risk of catastrophic wildfires, and providing a pathway to keep insurance available. Insurers’ models do not currently take into account forest treatment, but now that we have shown that it can be done, we expect insurers will begin doing so.”

Insurers face challenges writing insurance in areas at high risk of wildfires. Last year, the California Department of Insurance reported that between 2018 and 2019 there was a 61% spike in non-renewals by insurers for homes in ZIP codes with a moderate to very high fire risk, and a 203% decrease in the 10 counties with the highest exposure of homes in high to very high fire risk. The study found that funding more ecological forestry treatments can reduce wildfire risk and give insurers a better opportunity to continue writing insurance in high-risk areas.

“Wildfire risk in California and throughout the western United States is becoming uninsurable thanks to increasing risks due to climate change and overgrown forests laden with fuel,” said Dr Nidia Martinez, director of climate risk analytics at Willis Towers Watson’s Climate Resilience Hub. “The state-of-the-art analytics described in this report provide insurers across the board with tools to incorporate the true value of wildfire risk reduction through ecological forestry into underwriting decision-making. And the product innovations we present offer new approaches to protecting communities and businesses in the wildland-urban interface through insurance.”

“If we want to continue to have insurance in these areas and to reduce the loss of life and property, we need a lot more private and public funding for ecological forestry in national and other forests,” Jones said. “This spending is really an important investment in the future of these areas.”

 

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