Wildfire costs may trigger state’s rare Lloyd’s of London policy

Wildfires

The policy with the 335-year-old British risk insurance pool will help pay for fighting wildfires across Oregon

In this photo provided by the Oregon Office of State Fire Marshall, flames and smoke rise from the Bootleg fire in southern Oregon on Wednesday, July 14, 2021. The largest fire in the U.S. on Wednesday was burning in southern Oregon, to the northeast of the wildfire that ravaged a tribal community less than a year ago. The lightning-caused Bootleg fire was encroaching on the traditional territory of the Klamath Tribes, which still have treaty rights to hunt and fish on the land, and sending huge, churning plumes of smoke into the sky visible for miles. (John Hendricks/Oregon Office of State Fire Marshal via AP)

PORTLAND, Ore. (PORTLAND TRIBUNE) — Oregon will likely file a claim on its one-of-a-kind wildfire insurance policy with Lloyd’s of London.

“It looks like it is going to pencil out to about a $19 million claim,” said Jim Gersbach, spokesman for the Oregon Department of Forestry.

The policy with the 335-year-old British risk insurance pool will help pay for fighting fires that burned 225,007 of the 16 million acres protected by ODF.

ODF has purchased the insurance since 1973 as a hedge against firefighting costs that could overwhelm the budget of a heavily forested state with limited resources to battle major blazes.

The last district in Oregon declared the fire season over on Oct. 22. While the insurance coverage runs from April to April, Gersbach said all but a fraction of fires and costs occur between late spring and mid-autumn.

ODF calculates its 2021 spending on fire suppression at just under $129.2 million. After federal aid and other reimbursements, the net amount projects at just under $69 million. Under its policy with Lloyd’s, the state covers the first $50 million in costs — a kind of insurance deductible. Above $50 million, Lloyd’s covers the next $25 million. If costs are above $75 million, the bill reverts to the state.

But when costs get that high, the fires are reaching the level of a catastrophic disaster, which is what happened in 2020.

Policy negotiations

The 2020 Labor Day fires burned more than 1 million acres in the state, destroyed 4,000 homes, killed 11 people and required 40,000 people to evacuate their homes. Winds driving fires down the western face of the Cascades sped along river valleys, reaching the outer suburbs of Portland, Salem, Eugene and Roseburg. A fast-moving fire north of Ashland destroyed swaths of the towns of Talent and Phoenix.

In all, fires in 2020 burned 1.14 million acres in Oregon, including 399,670 acres of lands protected by ODF.

But the scale of the fires brought a torrent of federal disaster aid. ODF’s final cost of the 2020 wildfires was about $130 million. But the bill was offset by more than $70 million in federal disaster aid, along with additional aid and fees paid to ODF. That pushed the net fire costs to ODF in 2020 below $50 million. There would be no call to Lloyd’s of London.

“In the end, we did not have to file a claim,” Gersbach said.

Oregon pays $4,131,871 per year for the policy. The cost is split between the state and private timberland owners. Landowners pay their share through a property tax formula.

Gersbach said that during more than four decades, the state has received $99 million in claims payments from Lloyd’s, while paying $75 million in premiums. ODF last filed claims in 2013 for $25 million and 2014 for $23.2 million.

The current policy runs through April 15, 2022. Lloyd’s of London carries more than 90% of the policy, with Nashville’s Acceptance Insurance carrying the remainder.

During the winter, ODF and Lloyd’s of London will negotiate a new policy and premium, which has to be approved by the Legislature and Gov. Kate Brown.

Fires have grown in number and size in the past decade. But the state has expanded its fire prevention and firefighting capabilities. Both factors will affect the cost of a new policy.

‘Prudent relationship’

A one-of-a-kind insurance policy is not unusual for Lloyd’s of London. It began in 1686 as a company selling shipping insurance from a table at the back of a coffeehouse near the Thames River in central London.

Since a 1871 Act of Parliament, Lloyd’s has transformed into a risk pool. Today, Lloyd’s of London has about 90 members — companies, investment funds and a few individuals.

Policy payouts are drawn from a risk pool of about $48 billion. The wide spread of risk enables Lloyd’s to mute the impact of costs on any one member. The profits are also shared, with members reaping the benefit of premiums paid on the majority of policies that are not activated in any given year.

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Lloyd’s still sells shipping insurance and is based in the same neighborhood as the coffeehouse.

Most of its worldwide business is transacted online, but Lloyd’s gives a nod to its past by maintaining an underwriting room in London, with a soaring 197-foot atrium.

The pandemic flooded Lloyd’s with claims, leading the pool’s investors to absorb a $1.24 billion loss in 2020. But Lloyd’s doesn’t just sell insurance, it also buys it. Lloyd’s investors limit their ultimate financial exposure by purchasing annual “reinsurance” policies that kick in when costs escalate above a specific rate or level.

While ODF will have to wait until it meets with Lloyd’s to discuss terms of the next policy, Gersbach said the state hoped to mark the 50th anniversary in 2023 of the state’s “prudent relationship” with Lloyd’s of London.

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