The wildfires that ravaged Los Angeles for more than three weeks in January were an unseasonal fluke—and a signal of the more frequent natural disasters that come with a changing climate.
Massive property losses from years of California wildfires are pushing the insurance industry to rethink coverage for communities and businesses in wildfire zones. The latest innovation: A pilot project that provides incentives for landowners near Lake Tahoe to thin trees, clear flammable debris and undergrowth, and implement other wildfire prevention practices.
The Nature Conservancy partnered with global insurer Willis and UC Berkeley’s Center for Law, Energy and the Environment to underwrite $2.5 million in wildfire coverage for more than 1,300 acres of forest and recreational land managed by the Tahoe Donner Association in Truckee, Calif.
In exchange for the wildfire mitigation efforts, the homeowners association will pay nearly 40% less on its premium and nearly 90% less on its deductible than it would for other available insurance options.
“This first ever product that reflects and accounts for forest treatment in its pricing and underwriting terms demonstrates to other insurers that this can and should be done,” Dave Jones, California’s former insurance commissioner, who now heads the Climate Risk Initiative at UC Berkeley’s Center for Law, Energy and the Environment.
“Our objective, by having a global underwriter place it, is to persuade other insurers to do the same thing,” Jones tells ImpactAlpha.
Parametric payouts
The Nature Conservancy’s Eric Roberts said the new policy builds on decade-long work to “use insurance as a lever to advance nature-based solutions.”
TNC’s first tested insurance as a conservation tool in 2015, when the nonprofit explored opportunities to insure coral reefs against punishing storms. Reefs are important as protective barriers, biodiversity enclaves and sources of income and livelihoods for coastal communities. The first policy, issued in 2019, insured the state government of Quintana Roo in Mexico against hurricane damage to its coastal reefs if the area was struck by wind speeds greater than 100 knots.
Such “parametric” coverage is designed to automatically – and quickly – trigger a payout, without the need for the kind of damage claims filed under traditional indemnity policies.
As part of the insurance design, TNC worked with the local government and communities to assemble and train local response teams to work to salvage and restore affected reef areas in the event of a storm. Hurricane Delta in 2020 triggered the first payout under the policy and helped cover the cost of a multi-year restoration initiative that Quintana Roo and other government resources wouldn’t otherwise have been able to cover.
In 2022, TNC adapted the design for parametric insurance coverage of coral reefs across the Hawai’ian islands. The policy covers damage from both hurricanes and tropical storms.
There are now five active reef insurance policies in seven countries, including in Mexico, Belize, Honduras and Guatemala through a parametric insurance program designed by the Mesoamerican Reef Fund and Willis’s parent company, Willis Tower Watson. Up to a dozen more reef policies are in development.
TNC has also studied the feasibility of insuring mangroves against storm and wind-related damage. The organization is looking to pilot such coverage in Mexico, Florida or the Bahamas.
Other small-scale parametric insurance for climate risks have been piloted in the US and elsewhere. New York-based Floodbase offers predictive data and parametric insurance coverage for flood-prone areas in more than 40 countries. It has partnerships with a number of large insurers, including Swiss Re, Liberty Mutual Re, Axa Climate and Aon. Kenya’s Pula offers crop and livestock insurance to farmers in Africa. Luxembourg-based Ibisa offers parametric crop insurance and typhoon insurance in Asia and Africa.
BlueOrchard recently closed its second InsuResilience fund, which invests in innovative climate insurance providers in emerging markets. Its portfolio includes Brazilian parametric insurance startup Newe. The government in South Africa’s Western Cape, which includes Cape Town, is trying to collectively institute parametric insurance for a number of different municipalities in the province.
The California wildfire policy is the third model in TNC’s portfolio. The policy will pay out a predetermined amount per acre in the event of a wildfire on land covered by the policy, with funds available immediately.
With each innovation, Roberts says, TNC is helping the conservative insurance industry adapt to fast-changing climate risks and exposure, and helping governments, communities and businesses in safeguarding critical disaster recovery resources.
“What started with just the one project in Mexico has expanded significantly,” says Roberts. “We hope the same could happen with the wildfire resilience insurance.”
Emergency management
Innovation in the insurance industry is a necessity for communities and businesses increasingly exposed to climate threats. Globally, insurers faced $154 billion in catastrophic losses last year. Intensifying wildfire seasons on the West Coast has prompted many insurers to cancel renewals and stop issuing new insurance policies to California home and business owners.
Insurers are also increasing rates, dropping policies and declining new coverage in southern states because of longer and more intense hurricane seasons. Heavy wind and tornadoes in the Midwest are driving up the cost of home owners insurance in the region.
Political uncertainty about the future of disaster response and relief is adding to the urgency. The Trump administration is exploring options for “eliminating” the Federal Emergency Management Agency, or FEMA, which provides disaster response and funding across the country. The majority of the agency’s field workforce—“the backbone of the response”—is in limbo after a memo requiring most workers to have their positions reviewed by the Department of Homeland Security, CNN reported.
“It’s already having an impact, which is that we’re not preparing,” an unnamed FEMA official said.
The Nature Conservancy’s latest policy is designed to protect the Tahoe Donner Association, one of the largest homeowners associations in the US, by incentivizing proactive land management to reduce fire risk. Homeowners still have to maintain individual policies for their homes. “There’s certainly a benefit associated with the forest management occurring both within the homeowners association area as well as in the surrounding area,” Jones says.
Such collective action can help reduce soaring insurance premiums. The Community Based Catastrophe Insurance initiative is recruiting community organizations and local government agencies to help residents negotiate better terms and lower premiums with insurers. New York City is employing a similar concept to help low-income communities negotiate better flood protection.
The Tahoe Donner policy was designed based on a study the nonprofit conducted in in 2021 analyzing both parametric and indemnity-based wildfire protection models for property and the feasibility of pricing in forest and landscape management practices.
The study found that premiums could be reduced “because ecological forestry management reduces both the total burned area and high severity burned area of wildfires, in turn reducing both frequency and severity of wildfire at any given location.” The study determined that cost-effective parametric insurance was better suited to “real-world circumstances.”
Most of the management practices outlined in the policy are ones the Tahoe Donner Association has been practicing since 2015; the lower premium effectively aligns its insurance pricing for that work.
TNC is hoping to see the model replicated and adopted to expand the net of coverage. Its study suggests that policyholders, whether they’re organizations, businesses or governments, could raise capital from the bond markets to finance land and forest management practices by leveraging their long-term premium savings.
“The momentum I’ve seen since 2020—the number of insurers and other groups collaborating to use insurance to help people and nature adapt to climate change—it’s really growing,” says Roberts. “There’s a lot of energy behind it right now.”
