Knock on wood

Interesting facts about forests, the risks associated with them, and a little about how to insure them

Forestry insurance is still undervalued but can be a really good tool to reduce losses in the wood-processing supply chain. This year, it has become relevant especially for tourism in some countries where wildfires have created activity restrictions in specific areas.

Forest world

It is estimated that nearly 1/3 of the global population depends on forest goods and services for livelihoods, food security and nutrition. Tree stands outside forests contribute to the four dimensions of food security (i.e. availability, access, utilization and stability) by providing income, employment, energy, ecosystem services and nutritious foods.

Globally, about 1.15 billion ha of forest are managed primarily to produce wood and non-wood forest products. In addition, 749 million ha are designated for multiple use, which often include the production. Forestry is an integral part of the wood-processing industry. There is less and less natural forest on earth. On the other hand, the growing new plantations are developing very well. Many big wood-processing companies started doing vertical integration of their traditional facilities with forestry in order not to be fully dependent on external suppliers.

Source: Global Forest Resources Assessment 2020 – Key findings. Rome: FAO. 2020.

Source: Global Forest Resources Assessment 2020 – Key findings. Rome: FAO. 2020.

The area of naturally regenerating forests has decreased since 1990 (at a declining rate of loss), but the area of planted forests has increased by 123 million ha.

Forests cover nearly 1/3 of land globally. That is 4.06 billion hectares. In other words, there is around 0.52 ha forest for every person on the planet. More than half (54%) of the world’s forests are in just five countries: the Russian Federation, Brazil, Canada, the United States of America and China. 93% of the world’s forest area consists of naturally regenerating forests and 7% is planted.

Source: Global Forest Resources Assessment 2020 – Key findings. Rome: FAO. 2020.

More and more damage to forests

Forests face many disturbances that can adversely affect their health and vitality and reduce their ability to provide a full range of goods and ecosystem services. For example, about 98 million ha of forest were affected by fires in 2015. Insects, diseases and severe weather events damaged about 40 million ha of forests in 2015, mainly in the temperate and boreal domains.

The world’s climate is changing. Increased temperatures and levels of atmospheric carbon dioxide as well as changes in precipitation and in the frequency and severity of extreme climatic events are just some of the consequences. These changes are having a remarkable impact on the world’s forests and the forestry sector, e.g. through longer growing seasons, shifting ranges of insect pests and an increase of forest fires.
For example, in 2019 in Europe and MENA regions fires of greater than 30ha were observed in 40 countries and a total burnt area of 789 730 ha was mapped, which is nearly four times more than in 2018.

More and more damage to forests

  • In 2020, Siberia experienced a record-breaking heat in early summer, up to 38°C, and 14°C above normal; this exceptional climate situation has increased fire activity north of the Arctic Circle.
  • In July 2018 in Greece, several fires started around Athens during high fire danger conditions (i.e., hot, dry, windy weather). With flames reaching 30 meters high, fires spread fast and reached settlements, taking the population by surprise. 100 people died, 1650 homes were destroyed, and nearly 1,500 hectares were burnt.
  • In 2017, lightning-caused fires sparked in Portugal during severe fire danger conditions, burning over 500,000 hectares. 120 people died, many trapped in their cars while trying to drive away from the fast-spreading fires.
  • In 2018, unusually warm and dry conditions favoured the spread of fire across Scandinavia. Sweden was particularly impacted, with 25,000 hectares burned, mostly forests, in a country where timber is major source of revenue, and between 300-500 people were evacuated
  • In 2020, wildfires in the exclusion zone of Chernobyl in Ukraine, burned nearly 50,000 hectares.
  • In Poland in 2020, during prolonged drought conditions, human-caused fires spread through the Biebrza National Park, the largest protected area in the country. Fires burned nearly 6,000 hectares, or 10% of the park, which is home to exceptional biodiversity.

    The latest data on massive fires in 2021 can be summarized in the graphic below.
Source: Wildfires ravaging forestlands in many parts of globe

Source: Wildfires ravaging forestlands in many parts of globe

Stormy seasons
Climate change is not only associated with dry days and high temperatures, but also with more catastrophic wind speeds. The main losses are therefore damage to timber, pulp and logging, restoration costs and the loss of production capacity on forest land.

Source: Biggest windthrow volumes

There are various scenarios of damage after the storm:

  • Trees that are completely overturned but with part of their root system still in the ground may survive for a considerable period – little loss.
  • Trees that are partly overturned and are left leaning will continue to grow but may produce significant quantities of reaction wood in subsequent years.
  • The most harmful is breakage of wood <10 m. Stem breakage is more common on frozen soils or sites with deeper soil, and therefore better anchorage, especially forest brown soils or deep littoral soils.
  • If the degree of damage is less than 10%, no immediate management action may be required; if it is 10-30%, removal of the damaged wood must begin before it is damaged; and if the degree of damage is 30-40%, foresters usually clear the entire site.

Secondary losses resulted by storms:

  • Hail may cause big losses in nurseries and during the period immediately after planting out in the plantation; one consequence is a temporary impairment of growth;
  • Snow – the weight of snow has produced few claims in the past;
  • Ice is more devastating than snow weight; rare but can be widespread (e.g. Eastern Canada 1999);
  • Flood – Flood risk depends on location (floodplains) and vulnerability to water intrusion.

Forestry insurance

As for insurance, 2/3 of forests are insured under property policies, 1/3 of forests are insured under forest policies. The premium volume is estimated at around USD 150 million. The insurance cover is about 10% of all plantings

Source: SwissRe forestry presentation (agriinsurance conference in Istambul 2018)

The main risks that are covered by standard forestry “damage-base” insurance is fire, lightening and windstorm. Additionally, hail, ice, snow, flood and earthquake can be insured. Pests & diseases are main exceptions from the coverage but can be additionally indirectly insured via parametric insurance if there is strong correlation between the weather factor and the occurrence of higher pest populations and the spread of diseases.

There are several approaches to assessing the sum insured:

  • Establish a value of the timber per ha. This should reflect the tree species, age & yield class.
  • Cost approach. The total costs actually incurred to date for the establishment and maintenance of the forest (in the case of very young forest stands)
  • The purchase value of a forest stand. It values a forest at the value at which it would be sold if it were harvested at that time, e.g. stumpage method or fair value (standard IFRS 13)
  • Simply define (first) loss limits per m3 or ha. It is agreed that in the case of a loss the forest owner gets a maximum or fixed amount per m3 timber. Advantage: fast pay-out after a loss event.

Parametric forest insurance

Hurricane and forest fire risks can also be insured with parametric policies. Storm data are usually provided in the form of wind speed maps by independent private data providers. Based on this, the insured area will be divided into different speed zones. For each speed zone, a certain fixed indemnity is determined according to the insurance contract.

Regarding parametric fire insurance, data on burned-out areas can be provided from satellites (MODIS, Sentinel, etc.), based on the actual value of the insurance index is determined. The trigger for this policy is the minimum burn-out area.

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