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Insurers are experiencing a two-fold impact from climate change as both underwriters and investors, and some insurers, are investing in environmentally and socially responsible projects that also mitigate the risk of significant insurance payouts from future catastrophes.
One such project launched in November: a forest resilience bond developed by Blue Forest Conservation and the Washington, D.C.-based World Resources Institute to finance a $4.6 million restoration project in Tahoe National Forest in California. The private capital will pay for upfront costs of a project targeting 15,000 acres of forestland in the North Yuba River watershed via activities such as tree thinning, meadow restoration, prescribed burning and invasive species management.
One of the project investors is Walnut Creek, California-based CSAA Insurance Group, which offers auto, home and other personal lines insurance to AAA members through AAA clubs in 23 states.
Linc Walworth, vice president of investments at CSAA, had a “heightened sensitivity” to the damage caused by forest fires because his company has about a 17% market share in the burn area affected by the devastating wine country fires of 2017 in Northern California. The “immediate attraction” of the pilot project was its multiple benefits, including promoting the health of the forests, thereby reducing the risk of forest fires and reducing its risk as an insurer. He also liked the idea of CSAA being part of an investor group getting this concept off the ground and proving its effectiveness, with the intention of encouraging additional insurers and other investors to finance the scaling of similar projects.
“I’d love to get more insurers involved,” Mr. Walworth said. “This is an investment with a double bottom line. You’re going to earn a good market rate of return, and you’re helping the environment.”
The investors will be paid back by beneficiaries of such mitigation efforts, said Todd Gartner, director of WRI’s Natural Infrastructure initiative.
“The basic premise is that when these events happen — and unfortunately they are going to happen more frequently and more intensely in the face of climate change — there are downstream beneficiaries who have a lot to lose,” he said. “Even though there is generally a huge return on investment for these entities to be part of the solution, very few can cover the full freight of the work, (and) even fewer have the amount of money upfront to begin to pay for the work.”
Parametric insurance products are being deployed to support the transition to a low-carbon economy and address a growing concern for the risk management community: the challenge a shifting climate presents for the insurability of their assets.