Insuring urban forests: A call to action
Urban forests present a significant market for savvy insurers.
Editor’s Note: This is part-two in a three-part series about urban forests.
Urban forests make up more than 141 million acres of woodlands in the U.S. These forests hold significant economic and financial value. As a result, there are several opportunities for insurers to provide capacity and coverage for these high-value community assets.
Related: Does insurance hold the key to building resilience for urban forests? (Part one)
When considering the opportunities that urban forests present to insurers, we must start by examining the financial value they represent. One of the most straightforward ways to quantify the economic value of urban forests is by looking at functional services directly related to yearly cash flow.
In 2018, the U.S. Forest Service estimated the economic value of the services rendered by New York City’s urban forest to be equivalent to $330 million per year, or $47 per tree per year. This figure includes the following functional services in New York City, which are impacted by the presence of urban forests:
- Storage of 1.2M tons of CO2, valued at $153 million per year.
- Carbon removal of 51,000 tons, valued at $78 million per year.
- Reduction of annual residential energy costs, valued at $17 million per year.
- Reduction of water run off by 69M cubic feet/year, valued at $4.6 million per year.
- Health impact of removing pollutants from the air, valued at $77.8 million per year.
In addition to the monetary value of these functional services, the compensatory value, which represents the compensation that would be due to owners for the loss of an individual tree, can also be measured.
In that same 2018 report, the U.S. Forest Service estimated the compensatory value (e.g. the estimated value of compensation for the loss of the trees as a structural asset) of New York City’s trees at $5.7 billion per year, or $814 per tree. This figure is based on several factors. Chief among them are the health impacts that are mitigated by tree canopy, only partially considered among functional services.
While these benefits are important to highlight, we must also consider the expenses necessary to maintain each of these trees. To have thriving, healthy urban forests, trees need to be tended to and maintained. These functions come at a significant cost, but because urban forests supply considerable economic services to cities and their inhabitants, they are an asset that is monitored and assessed on a regular basis by proactive cities.
New York City, for example, has a budget of around $600 million per year to maintain its portfolio of parks and trees. A thoughtfully designed insurance product must take these expenses into consideration alongside the calculated value of an urban forest.
Carriers take notice…
Urban forests present a significant market for savvy insurers.
The Total Addressable Market (TAM) for urban forest insurance varies depending on whether it is based on compensatory or functional value per tree or actual replacement cost. Either way, research shows that if every urban tree is insured, the market is in the billions for the U.S. alone. This presents a compelling reason for carriers to take notice of these assets and consider the potential growth opportunities.
To refine risk evaluation, carriers can leverage available technologies and create resilience solutions designed to address forest risks. Satellite monitoring can help spot areas that require human intervention to prevent tree mortality. A carbon insurance product associated with the loss of carbon captured by a tree can also be developed, and the same can be done for the loss of other ecosystem and economic services.
Additionally, parametric insurance products could be created by orchestrating the right technology ecosystem, including Internet of Things (IoT) and or satellite imagery, to count, assess and monitor urban forests quality and quantity. A parametric rating engine could ingest data and event history to define standard deviation through simulation/scenarios, leading to the defining of premium, trigger, deductible, sum insured, and maximum per year/event.
For insurers interested in underwriting urban forests, municipal parks and recreation departments and budgets could also become an underwriting criterion to risk select cities. Key factors can include the percentage allocated to inspect trees, invested to prevent diseases, and the number of arborists on staff to ensure regular and timely inspection. To increase portfolio diversification, underwriters could incorporate urban forests that are not as prone to weather catastrophe events and tune their underwriting methodology accordingly.
We have identified relevant data partners and capabilities for parametric. Insurance capacity is the last piece of the puzzle to come to the table. Once that is in place, the time will be right to create industry opportunity and preserve these important natural resources in the process.
Dominique Roudaut is the chair for Nature at InnSure and has been chief underwriting, strategy and innovation officer and a venture and operating partner for incumbents, VCs and start-ups. This three-part series was developed in conjunction with InnSure. These opinions are the author’s own. This column is published with permission from the author and may not be reproduced.
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