New Wildfire Resilience Insurance in Tahoe Donner: Q and A with Dave Jones
An innovative insurance product was recently piloted in Truckee, California. The Nature Conservancy, Willis Towers Watson, and the Climate Risk Initiative at the UC Berkeley Center for Law, Energy, & the Environment collaborated on an effort to help insurance take account of nature-based efforts to lower wildfire risk. Insurance for Good sat down with Dave Jones, the Director of the Climate Risk Initiative, to discuss the wildfire resilience insurance product written for a community in the forest. You can read more about the details in this technical report.
Insurance for Good: Thanks for speaking with us, Dave. Let’s start by talking about the risks. This pilot is taking place in an area very prone to wildfires, correct? Who purchased the policy and what risks are they concerned about?
Dave: Yes, the wildfire resilience insurance policy was written for a residential community—the Tahoe Donner community—in the forest, in an area where other insurers are not renewing or writing new insurance because of the high risk of severe wildfire. The wildfire resilience insurance policy was designed, structured, and written to take into account the nature-based forest management undertaken by the community in the surrounding area, where they have used thinning and prescribed fire to reduce the fuel in the forest. It’s the first ever insurance policy underwritten because of landscape scale forest management. Our goal was to demonstrate that insurers can write insurance taking into account the risk reduction associated with forest management.
There is a wealth of science and empirical evidence which shows that if we manage our forests the way that nature historically managed the forest, we can substantially reduce the risk of loss from severe wildfires. Before western settlement, fire was a routine part of the ecology of western forests. And native American people who lived in the west also engaged in cultural burning and landscape management using fire. Our western forests historically were characterized by fewer trees, and more open space between trees, because fire would routinely burn low-lying vegetation and smaller trees. With the onset of western settlement and genocide against native Americans, fire in western forests has been suppressed for 150 years or so. As a result, our forests have become overgrown with trees and underbrush, which, when ignited, carries the fire into the crowns of trees with catastrophic results.
There is a widespread scientific consensus that mimicking how nature used to manage our forests, through the use of thinning and prescribed fire and controlled burning, is positive from an ecological standpoint, reduces the fuel in the forest, and substantially reduces the risk of severe wildfires. Federal, state and local governments are spending billions on forest management, as are private landowners and homeowners associations like Tahoe Donner. Tahoe Donner has an active forest management program which involves thinning and reducing the fuel in its 7,500 acres of forested land. And the Truckee Fire Protection District in which Tahoe Donner is located and the Tahoe National Forest which adjoins the Tahoe Donner community, are also implementing forest management.
The problem we are trying to solve is to get insurers to take forest management into account in writing insurance, which, until we designed, structured and placed the wildfire resilience insurance, they have not done. Having an insurer write insurance for the first time in a forested area at high risk of wildfire, because of forest management, demonstrates to other insurers, including home and business property insurers, that they can and should do so, too.
Insurance for Good: With that understanding of the importance of forest management, can you now discuss some of the details related to this new product? Who bought it? Who sold it? How much coverage was it?
Dave: The wildfire resilience insurance policy was purchased by the Tahoe Donner community, which is a 6,500-home community spread across 7,500 acres of forested land in the Sierra Nevada of northern California, near the town of Truckee. The insurance policy was designed, structured, and placed through a partnership between the Center for Law, Energy & the Environment at UC Berkeley, The Nature Conservancy, and Willis Towers Watson, a global risk advisory and insurance broker. The insurance covers 1,345 acres of largely recreational land owned by Tahoe Donner which is used for hiking, mountain biking, cross country skiing, and downhill skiing, and the amount of the coverage is $2.5 million. The insurance underwriter is Globe Underwriting and the capacity provider is Liberty.
Insurance for Good: We understand that it is a parametric insurance policy, which means that it pays a predefined amount based on a measure of the hazard. Is that correct? If so, can you talk to us about what would trigger payout and how that was determined?
Dave: Yes, it’s a parametric insurance policy. Parametric insurance differs from traditional indemnity insurance in that it pays out a predetermined amount based on an objective trigger, as opposed to the policyholder having to file a claim and prove what their loss is. In this case, the trigger is burned acres. If any of the 1,345 insured acres is burned, the policy pays out at a predetermined amount per acre, up to $2.5 million. The policy also pays out less per acre if the fire is less severe and stays on the ground, as opposed to burning the trees themselves—this is the kind of beneficial fire that is desirable, one which burns less severely due to forest treatment, so the payout is lower. Satellite imagery is used to determine what acres burned and at what severity, but a policy like this can also be structured so that it triggers based on fire officials’ determination of the acres burned. The per acre value of the land is based on its recreational value and the cost of dealing with erosion, debris and tree removal, and rehabilitation of the forested acreage in the event of a severe fire. While Tahoe Donner has indicated it would use the insurance payout to restore the burned land and its recreational use, one of the other important features of a parametric insurance product is that the policyholder is allowed to use the proceeds as they see fit. So, the insurance proceeds could go toward rebuilding burned structures, although Tahoe Donner has not indicated that they would use the proceeds in that way.
Insurance for Good: Now to get to the really interesting aspects of this pilot. The underwriting and pricing took into account risk reduction measures in the surrounding forest that had been done by the community. As many of our readers will be aware, there have been challenges to getting insurance pricing and underwriting to reflect, in a timely way, investments in loss reduction. How is that working in your pilot?
Dave: One of the biggest frustrations and challenges with property insurance today is that the insurers do not take into account the risk reduction associated with property, community, or landscape scale investments in risk reduction. So, a homeowner can spend thousands on home hardening and defensible space, and pay federal, state and local taxes and homeowner association fees for forest management nearby, but their insurer does not take any of that into account when it comes time for renewal, and the homeowner is not renewed or the insurer refuses to write new insurance. In 2021, when I was at The Nature Conservancy, I led a project in collaboration with Willis Towers Watson, to demonstrate that the computer risk models used by insurers are able to account for forest management. We published a paper in 2021 which demonstrated how the models can be adjusted without a lot of effort, to account for forest management. And our results were replicated a year later in a separate paper released by Moody’s RMS, the insurance industry cat modeler.
The problem is that until our placement of the wildfire resilience insurance for Tahoe Donner, insurers had not accounted for forest management in their underwriting modeling used to decide whether to write or renew insurance.
The big deal here is that the insurance was written at all, in an area where other insurers are not renewing or writing insurance. We demonstrated that insurance can be written successfully where there is forest management to reduce wildfire risk. The other benefit of the forest management is that it resulted in a lower price for the insurance. The premium was 39% less and the deductible was 84% less because of the forest management. While better pricing is good, getting the insurance written at all is the bigger deal. A lower price for taking into account forest management doesn’t matter if the insurer won’t write the insurance because they are not accounting for forest management in the risk models they use for underwriting—the writing and renewal of insurance. Which is the big problem for home and business property owners in forested areas today—they cant get insurers to write or renew insurance.
Insurance for Good: What every resident of California wants to know is how to get such benefits reflected in their homeowners premiums and in the risk score used by insurers to decide whether to write or renew insurance! Do you think this pilot can be instructive for the broader homeowners market or for home hardening efforts?
Dave: There is no reason why home insurers cannot take home hardening, defensible space, and forest management into account when writing or renewing home insurance and pricing it. They can and should. We hope that with this first ever placement of wildfire resilience insurance, other insurers will begin to take forest management into account when deciding whether to renew and write insurance and how to price it. We have gotten a lot of interest from commercial property insurers since we placed the wildfire resilience insurance last month. So far, we have not heard from home insurers, but they can and should take forest treatment into account in their risk models for underwriting. We plan to continue working with insurers to place more wildfire resilience insurance, which in turn should encourage more insurers that they can do so too.
Insurance for Good: Thank you so much for talking to us! Is there anything else you’d like to add?
Dave: While insurers can and should take into account property, community, and landscape scale investments in risk reduction, people, business, and communities are getting increasingly frustrated that they are not doing so. We need more homeowners and business property owners to invest in “hardening” their homes and businesses from wildfire and to implement defensible space, and we need more local, state and federal investments in forest management. But support for these investments in mitigation will erode if home and business property owners continue to get no credit in underwriting modeling for these investments. Taking mitigation into account is also a way to help keep insurance available for home and business property owners.
In Colorado, the Legislature this year passed a bill sponsored by Colorado Insurance Commissioner Michael Conway that was just signed by Colorado Governor Jared Polis which requires the risk models used by insurers to write, renew, and price insurance to take into account property, community and landscape scale investments in risk reduction, like home hardening, defensible space, and forest management. While a number of states, including California, require a price discount for home hardening against various perils, Colorado is the first state to pass a law to require that risk models used for underwriting also take property, community and landscape scale mitigation into account, thanks to the leadership of its Insurance Commissioner Michael Conway. The new Colorado law reflects home and business property owners’ frustration with insurers not doing this voluntarily. Other states will follow Colorado’s lead if insurers don’t voluntarily start accounting for property, community and landscape scale forest management and other nature-based approaches to risk reduction in their computer risk models for writing, renewing and pricing insurance.
