Insurance and Forest Rotation Decisions Under Storm Risk

Abstract

Forests are often threatened by storms; and such a threat is likely to increase due to climate change. Indeed, climate change is expected to increase the frequency and intensity of extreme events such as intensive storms. For forest owners, adaptation to climate change will require major adjustments in forest management practices. Then, forest owners will have to take these increasing risks into account through risk-sharing (insurance) and risk-reducing strategies (reduction of rotation length). In this paper, we propose to jointly analyze the forest owner's insurance decision and the rotation age under storm risk. We extend the Faustmann optimal rotation model under risk, first, considering the forest owner's preferences towards risk, and second, integrating the decision of insurance. With this analytical model, we show that unless the forest owner's discount rate and the insurer's discount rate are sufficiently unequal, it is not optimal for the forest owner to adopt insurance. We prove that the rotation length increases as the insurance premium increases, i.e. substitution between the two coverage mechanisms. Finally, we discuss the potential implications of government policy on the insurance scheme.

Windstorm Impacts on Forest-Related Socio-Ecological Systems: An Analysis from a Socio-Economic and Institutional Perspective

“…One of the main determinants limiting forest owners' adaptation capacity is the strong risk-aversion characterizing their behavior and managerial approach [79,89]. This was confirmed by Lidskog and Sjödin [90] who stressed how, especially after having experienced windstorm damage, forest owners' managerial preferences are oriented towards long-term and experience-based practices rather than the application of expert-based recommendations.…”

“…However, damages to buildings and infrastructures and related economic impacts cover 3% of direct windstorm impacts addressed by the scientific literature reviewed. Similarly, despite the fact that insurance is one of the key measures to cover economic losses deriving from natural hazards [26] and that several authors have depicted ambiguous behavior in relation to their purchase policies [75,89], direct windstorm impacts on insurance markets and policies are also very poorly investigated (3%)-i.e., changes in insurance policies and changes in insurance markets. Finally, impacts on ecological dimensions and ecosystem services-i.e., changes in forest structures and species composition; forest ecosystem biodiversity; changes in forest functions, etc.-together made up 10.0% of total direct windstorm impacts.…”

“…As stressed in most of the reviewed papers, the above-mentioned increase in harvesting costs is likely to negatively affect the overall profitability of forest management [18,27,85,98]. The trade-offs between necessary forestry operations and overall economic outcomes could ultimately discourage private forest owners from implementing unplanned operations [78], especially if the expected stumpage value is negative due to the additional costs borne [88,89]. Besides the increment in costs and expected reduction in profits, the limited availability of adequate human resources and technologies and difficult work-site conditions could disincentive post-windstorm salvage logging operations, again, especially for private forest owners [38,99].…”

“…While governmental subsidies can limit negative consequences in the immediate post-event phases and boost technological investments [100] the lack of a long-term view limits nonindustrial forest owners' economic self-sufficiency [75]. This was discussed in several articles, especially in relation to forest owners' wind risk adaptation strategies, stressing how the expectations of governmental aid compensating windstorm damages decreases the implementation of preventive wind risk-reducing measures [75,89,104]. Post-windstorm governmental compensation measures are likely to have a negative impact on private forest owners' risk behavior, inhibiting the introduction of efficient risk-reducing measures, as well as the efficiency of the insurance market [71].…”

“…Indeed, the presence of public subsidies restrains the formulation of adequate insurance policies that meet forest owners' needs and willingness to pay [71,79]. Thus, despite insurance coverage being identified as a good option for compensating wind damages [27,98], the limited number of stipulated insurance policies hampers the identification of optimal insurance features that respond to forest owners' preferences and utility function [71,89].…”