LONDON, July 7, 2021 — The Nature Conservancy and Willis Towers Watson have today published analysis that shows how ecological forest management, which reduces the risk of severe wildfires in fire-adapted forests, can be combined with insurance and significantly reduce insurance costs. By modelling the impact on insurance of controlled burning and ecological thinning of overgrown forests, researchers at TNC and Willis Towers Watson were able to quantify insurance premium savings. In turn, these savings could be used to fund further investments in sustainable forest management.
The report, Wildfire Resilience Insurance: Quantifying the Risk Reduction of Ecological Forestry with Insurance, finds that the practice known as ecological forestry, which includes prescribed burns and the removal of smaller trees and other vegetation in overgrown forests (i.e. thinning), leads to decreases in total insurance premiums by 41% for homes and a range of decreases for commercial property, while also reducing the likelihood of extreme wildfires in these communities.
The report explores how the insurance savings from ecological forestry could be captured and applied to pay debt service on bonds which would be issued to pay for ecological forest treatment. In this way, the insurance savings can contribute to funding or financing the ecological forest treatment, creating a “virtuous circle”.
For the first time, the project tested “parametric” insurance as applied to the intensity and acreage of wildfires, resulting in a reduction in both losses and premiums. Such 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 and is an innovative way for insurers to cover fire risk.
The project used an ecological forest restoration project in the watershed of Placer County Water Agency in the Tahoe National Forest in northern California. The researchers found that ecological forestry in the watershed reduced the risk of wildfire substantially for the 81,000 homes in and around the watershed, which in turn could reduce aggregate home insurance premiums $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 The Nature Conservancy and former California Insurance Commissioner. “These widely-supported forest treatment practices - prescribed burns 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 it can be done, we expect insurers will begin doing so.”
Due to the high risk of wildfires and associated losses, insurers are finding it a challenge to write insurance in areas at risk of wildfire. In late 2020, the California Department of Insurance reported that between 2018 and 2019 there was a 61% increase in non-renewals by insurers for homes in ZIP codes having an area with moderate to very high fire risk, and a 203% increase in the top 10 counties with the highest exposure of homes in high to very high fire risk. The results of the study indicate that funding more ecological forestry treatments can reduce wildfire risk and provide a better opportunity for insurers to continue writing insurance in high risk areas.
“Wildfire risk in California and throughout the western United States is becoming uninsurable.”
Dr. Nidia Martínez,
Director of Climate Risk Analytics at the Climate and Resilience Hub, Willis Tower Watson.
“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 Martínez, Director of Climate Risk Analytics at the Climate and Resilience Hub, Willis Towers Watson. “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,” said Jones. “This spending is really an investment in the future of these areas.”
The case study results are applicable to other similarly forested regions in California and other western states. The work also opens up the possibility to consider combining nature-based risk mitigation and risk transfer in other fire-prone regions around the world.
The report also includes a series of recommendations, including for federal, state and local policymakers to fund more forest treatment in national and other forest lands, so that communities and businesses can see the resulting risk reduction and insurance benefits shown in the paper.
The Nature Conservancy will continue its comprehensive approach with these stakeholders to improve wildfire resilience, including through the upcoming launch of a collaborative discussion series in partnership with the Aspen Institute.
The Nature Conservancy is a global conservation organisation dedicated to conserving the lands and waters on which all life depends. Guided by science, we create innovative, on-the-ground solutions to our world's toughest challenges so that nature and people can thrive together. We are tackling climate change, conserving lands, waters and oceans at an unprecedented scale, providing food and water sustainably and helping make cities more sustainable. Working in 72 countries, we use a collaborative approach that engages local communities, governments, the private sector, and other partners. To learn more, visit www.nature.org.
Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential.
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