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Innovating wildfire insurance

Andrew Avitt
Office of Communication

Editors note: The Innovative Finance for National Forests grant program, supports partner organizations developing out of the box financial solutions to some of forest management’s most vexing challenges. One partner, The Nature Conservancy, focused on using insurance premium reductions to incentivize forest conservation.

A picture of significant wildfire activity in the hills behind a local community.
Wildfire Resilience Insurance, which accounts for the risk reduction benefit of ecological forest treatment, provides insurance premium savings which in turn can be used to fund further ecological forest treatment to reduce wildfire risk. (Photo by Ben Jiang/ The Nature Conservancy photo contest)

Property insurance premiums for communities, businesses, and homeowners are based on numerous factors and inputs of actuarial science. Some of those inputs include the quantity and history of claims in an area, the location itself, property value…. Global warming? While not directly, studies have linked climate change to another risk factor considered in calculating property insurance premiums... wildfire.

Trends in wildfire activity show that fires are growing bigger and more intense across the western United States, destroying more structures with increasing associated costs. In 2020 there were 58,950 wildfires, affecting 10.1 million acres, in contrast to 18,229 wildfires and 1.3 million acres affected in 1983. The ever-growing risk to companies, communities and private landowners has drastically increased insurance premiums for properties at risk of wildfire, and it is expected that those premiums will only continue to rise, making insurance policies unaffordable for many.

But that doesn’t necessarily need to be the case. Recently, The Nature Conservancy, supported by an Innovative Finance for National Forests grant from the USDA Forest Service, the National Forest Foundation, and U.S. Endowment for Forestry and Communities, focused its efforts on proving that ecological forest management could lower insurance premiums.

A picture showing significant smoke rising up in the hills behind a local community.
A substantial and growing body of evidence suggests that increasing temperatures and shifting precipitation patterns associated with climate change is resulting in larger and more severe wildfires. It is this long-term trend that is causing increasing damage and also increasing wildfire insurance premiums for landowners, communities and companies alike. (Robert Couse-Baker/Creative Commons).

"Forested lands in the west and adjacent communities are at risk of increasingly severe wildfires,” said Dave Jones, senior director of environmental risk at The Nature Conservancy and prior Insurance Commissioner for the state of California. “Wildfires are taking more lives, causing more injuries, destroying more homes and other structures, and at the same time, insurers are declining to write insurance policies for those facing substantial wildfire risk.”

State and federal land agencies and conservation organizations such as The Nature Conservancy already employ proven methods of ecological forestry management practices – such as prescribed burning and forest thinning – to reduce the risk of severe wildfires. These treatments increase forest health and productivity while also reducing the amount of organic material or “fuel” available to burn.

Private property and asset owners, including businesses, public agencies, and communities, also stand to benefit from those same practices. This led The Nature Conservancy to develop an innovative financial solution that would both serve to mitigate severe wildfire risk, thereby lowering insurance premiums.

A picture of wildfire flames burning behind a house.
 Increasing severity of wildfires in California results in more deaths, injuries, and destruction of homes and businesses. © Jerry Dodrill

The project, at its foundation, explored how creating more wildfire-resistant landscapes through ecological management could translate into lower insurance premiums for policyholders.

The Wildfire Resilience Insurance project demonstrated that this reduction in risk and loss can be modeled by insurers,” said Jones, “With the reduction in expected losses due to severe wildfires, the amount of premium which is needed to be collected by insurers to cover those losses declines as well."

The Nature Conservancy used its French Meadows Forest Restoration Project, a 28,000-acre ecological forestry project in the Tahoe National Forest in Placer County, California, as a test case for the insurance study.

Partnering with global insurance and risk advisory firm Willis Towers Watson, current insurance models were modified to account for ecological forest management.

A graphic is from a report released by The Nature Conservancy illustrates the difference of a how a fire behaves on a fire suppressed forest vs. an ecologically managed one.
The above graphic is from a report released by The Nature Conservancy illustrates the difference of a how a fire behaves on a fire suppressed forest vs. an ecologically managed one. Ecological forestry has been shown to reduce the severity of wildfires and is increasingly accepted in forest management practice to deliver multiple benefits. (Graphic by Erica Simek Sloniker /The Nature Conservancy)

The study found that there were reductions in premiums for various types of commercial and residential insurance.  For example, The Nature Conservancy and Willis found that 81,000 homes would see a total annual premium savings of 41% or $21 million a year.

The Nature Conservancy also explored how those same insurance savings can be captured and used to fund forest treatment. In most cases, insurance premium savings were sufficient to fund additional ecological forest management projects, leading to further savings and an even more resilient landscape.

What’s more, Jones said the approach is scalable and can be implemented in other states where forests are subject to similar fire behavior as the forests of the Sierra Nevada.

"The approach is applicable wherever there are landscapes at risk of wildfire and where ecological forest treatments can reduce those risks,” said Jones. “Now that we have demonstrated, for the first time, that insurance modeling can take into account the risk reduction benefit of ecological forest treatment, we expect insurers to begin to take up the results of the Wildfire Resilience Insurance project in their own modeling and pricing of wildfire risk."

For more information on the Wildfire Resiliency Insurance project visit https://www.nature.org/en-us/newsroom/ca-wildfire-resilience-insurance/. To learn more about the Innovation Finance for National Forest grant program and how to apply, visit the National Forest Foundation.

https://www.fs.usda.gov/features/innovating-wildfire-insurance