Wildfires Leave Forestry Companies Struggling for Insurance

SYDNEY -- After wildfires burned through his timber plantation on southern Australia's Kangaroo Island, Keith Lamb gauged what could be saved and called his insurer. The conversation didn't go well: The insurer declined to renew his policy.

As the forestry industry faces increased fire risk amid a warming climate, companies around the world, including in the U.S., are more exposed to losses from blazes than ever before and are struggling to get insured. Some owners, such as Mr. Lamb, are paying sharply higher prices to stay protected. Others are buying insurance for part of their landholdings, while others can't get coverage at all.

"We got a very, very slim offering," said Mr. Lamb, 54 years old. "We were successful in obtaining coverage, but it was much more expensive."

Around 95% of Kangaroo Island Plantation Timber's 14,500 hectare plantation had been ravaged by fires over a year ago, cutting its value to around $5 million, from $87 million beforehand. When Mr. Lamb, KIPT's managing director, found a new insurance policy, fewer insurers were offering coverage for forests.

Fires have been growing more intense around the world, and the blazes in Australia in the 2019-2020 summer were unprecedented in scale, devastating an area the size of Arizona. In New South Wales state, home to Sydney, more than a quarter of timber plantations managed by Forestry Corporation NSW on behalf of the government were damaged. The industry, which typically generates more than $3.6 billion in annual revenue and is a major exporter to Asia, will take years to recover.

In California, wildfires burned through 1.7 million hectares last year, including 60,000 hectares of commercial forests, according to data from Calforests, which represents the state's timber industry.

"Most insurance companies are currently writing 'wildfire exclusions' into any liability coverage, so this insurance has become very difficult to get," said Rich Gordon, Calforests' president. "When such insurance is available, the coverage has gone down and the price has gone up."

Mr. Gordon said U.S. timber companies are absorbing the additional cost of insurance without laying off workers, but are fearful of the future if the price of coverage continues to rise.

It is a warning sign for other industries and communities that face rising risks from climate change. Agriculture is another sector on the front lines because a warming climate changes where farmers can plant crops, while higher carbon dioxide levels can affect the growth and value of produce, said Australia's Department of Agriculture, Water and the Environment.

Forestry owners are especially exposed. While livestock farmers can buy more animals after a fire or crop growers can wait for a new season, it takes years before seedlings turn into mature trees.

At KIPT's plantation, pine trees typically take 30 years to grow. The blue gum trees, a native Australian variety, which made up most of the estate, more easily adapt to fires and have regrown shoots. Still, they are harvested 10 years after planting.

In Australia, the mean temperature from 2011 to 2020 was the highest on record, at nearly a full degree Celsius above average, Bureau of Meteorology data show. Australia's warmest-ever spring happened last year. Fires are more likely to start, and continue to burn, in hot, dry and windy weather because vegetation turns tinder-dry and is more flammable, the bureau says.

Noticing these trends, insurers are pulling back from providing coverage. With wildfire seasons lasting longer, Allianz SE (ALIZF) last year changed its approach to Australian homes and businesses such as timber plantations in high-risk areas.

"The resulting change in Allianz's bush-fire risk appetite has resulted in a reduction in our willingness to insure higher-risk properties located in bush-fire-prone areas or the need to increase premiums for such properties to better reflect their bush-fire risk," the insurer said.

Across the industry, insurers have estimated losses at $1.78 billion from claims to date from households and businesses affected by Australia's 2019-2020 fire season.

In the U.S., forest owners have historically been able to buy insurance that gives them liability coverage for fires that start on their land and then spread to neighboring properties, but they aren't covered for fires that start outside their property and encroach on their lands, said Mr. Gordon, of Calforests.

That is a concern as fire seasons become more intense. Wildfires throw off hot embers that can start spot blazes several miles away. Lightning strikes are another threat.

Industrial timber plantations aren't protected under U.S. government insurance plans that protect other agricultural operations, such as corn destroyed by a tornado, Mr. Gordon said. No such insurance pools exist in Australia.

Many forestry owners haven't been able to get insurance as it isn't widely available, and have relied on strategies such as carving deep gaps between tree clusters to create fire breaks and spacing water tanks around plantations, said Brian Shillinglaw, managing director of New Forests Assets Management Pty Ltd.'s North American division.

Self-insurance is another tactic, with companies setting aside capital that can be reclaimed when they suffer losses from fires. But that is often beyond the finances of smaller forestry companies.

Hancock Victorian Plantations said it was becoming harder and more expensive to insure against fire losses in its 240,000 hectares of forest in Australia's Victoria state. The company said it expects to spend roughly $6.5 million on fire-prevention measures, excluding insurance costs, in the 12 months through June.

Even timber companies that have been largely untouched by wildfires are paying for the risk. New Forests said its insurance premiums in Australia have nearly doubled over the past two years. For the current fire season it was able to secure coverage for its Australian forests, but with tighter terms and conditions.

Jon Gapes, managing director of underwriter Insurance Facilitators, said smaller plantation owners in Australia were most at risk of being left without cover. "The cost of it all has just become too much for some of these," he said.

For Mr. Lamb, losses from the Kangaroo Island fires have been cushioned by a $49 million payout under his old insurance policy. Getting coverage again has meant paying a 400% increase on that policy relative to the value of the remaining trees.

Still, he thinks any coverage is worthwhile given increasing fire risk and his front-line experience battling the flames a year ago, a fire in which two firefighters died.

"That day was one of the worst days I've dealt with," Mr. Lamb said.

Write to Alice Uribe at alice.uribe@wsj.com

  (END) Dow Jones Newswires
  02-26-21 0814ET
  Copyright (c) 2021 Dow Jones & Company, Inc.

News, commentary and research reports are from third-party sources unaffiliated with Fidelity. Fidelity does not endorse or adopt their content. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from their use.