Wildfire resilience insurance: quantifying the risk reduction of ecological forestry with insurance

For California’s 39 million residents, the physical impacts of climate change are clear and present, especially for the 2.7 million living in areas at substantial risk of severe wildfires. In 2018, the Camp Fire burned nearly 19,000 structures, killing at least 85 people and resulting in insured losses of $12 billion. In 2020, six of the 20 largest California wildfires occurred in 2020, resulting in estimated insured losses of $5bn-$9bn. By June 2021, the rate of wildfires had already exceeded that of 2020 by almost 40%.

Viewed through a risk management lens, wildfire risk in California and throughout the western United States is becoming uninsurable. 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 fire risk and a 203% increase in the top 10 counties with the highest exposure.

A new report co-authored by The Nature Conservancy and Willis Towers Watson, using our natural catastrophe modelling, shows that prescribed burns and the removal of smaller trees and other vegetation in overgrown forests (i.e.: ecological forestry) can significantly reduce the costs of insurance in areas at risk of wildfires, providing a better opportunity for insurers to continue writing insurance in high-risk areas. The report, Wildfire Resilience Insurance: Quantifying the Risk Reduction of Ecological Forestry with Insurance, also found that “ecological forestry” leads to decreases in total insurance premiums by 41% for homes and reduces the likelihood of extreme wildfires in these communities.

For the first time, the project tested parametric insurance as applied to both 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 report explores how the insurance savings from ecological forestry could be captured and applied to pay debt service on bonds that 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”.

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.

“Wildfire risk in California and throughout the western United States is becoming uninsurable thanks to increasing risks due to climate change and changes in forest management,” said Dr. Nidia Martínez, Director 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 affordable insurance.”

In fire-adapted conifer forests, ecological forestry results in forests that are healthier, more resilient to drought and other negative impacts of a warming climate, and which are at a reduced risk of generating and sustaining high-severity wildfires. The report also finds that ecological forestry results in insurance savings to varying degrees for parametric insurance which could cover various wildfire related costs for a water and power agency or for a timber company, for example, as well as reducing the cost of traditional indemnity insurance for commercial and residential structures vulnerable to wildfire.

“For the first time we are demonstrating that insurance modeling and pricing can account for the severe wildfire risk reduction benefit of ecological forest treatment,” said Dave Jones, Senior Director of Environmental and Social Risk at The Nature Conservancy and former California Insurance Commissioner. “These widely-supported forest treatment practices -- prescribed burns and ecological thinning provide the dual benefit of improving forest health while decreasing the risk of catastrophic wildfires in communities in or adjacent to forests. 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.”