Gary A. Warner Oregon Capital Office
Oregon is likely to file a claim on its unique bushfire insurance policy with Lloyd’s of London.
“It looks like it’s going to end its claim for about $19 million,” said Jim Gersbach, a spokesperson for the Oregon Forest Department.
The policy with the 335-year-old British Risk Insurance Trust will help pay for the firefighting that has burned 225,007 acres of the 16 million acres protected by ODF.
ODF has purchased insurance since 1973 as a hedge against firefighting costs that could overwhelm the budget of a forest-dense country with limited resources to fight major fires.
The last area in Oregon declared the end of the fire season on October 22nd. And while insurance coverage runs from April to April, Gersbach said all but a fraction of fires and costs occur between late spring and mid-fall.
ODF calculates its 2021 spending on putting out fires at less than $129.2 million. After federal aid and other reimbursements, the projects net amount is just under $69 million.
Under its policy with Lloyd’s, the state covers the first $50 million in costs — a type of deductible insurance.
Over $50 million, Lloyd’s covers the next $25 million.
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If costs are above $75 million, the bill goes back to the state.
But when costs are so high, fires reach the level of a catastrophic catastrophe, which they did in 2020.
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 to evacuate. Winds driving the fires blew down the western face of the Cascade Mountain Range along river valleys, reaching the outer suburbs of Portland, Salem, Eugene, and Roseburg. A fast-moving fire north of Ashland destroyed large swathes of the towns of Talent and Phoenix.
In all, fires in 2020 burned 1.14 million acres in Oregon, including 399,670 acres of land protected by ODF.
But the scale of the fires brought a flood of federal disaster aid.
The final cost to ODF for the 2020 wildfires was approximately $130 million. But the bill was offset by more than $70 million in federal disaster aid, along with additional aid and fees paid to the African Development Fund.
This drove net shooting costs to the Overseas Development Fund in 2020 to less than $50 million. There will be no invitation to Lloyd’s of London.
“In the end, we didn’t have to complain,” Gersbach said.
Oregon currently pays $4,131,871 annually for this policy. The cost is divided between the state and private forest owners. Land owners pay their share through the property tax formula.
Over four decades, Gersbach said, the state received $99 million in claims payments from Lloyd’s, while it paid out $75 million in installments. ODF last filed claims in 2013 for $25 million and 2014 for $23.2 million
The current policy runs until April 15, 2022. Lloyd’s of London holds just over 90% of the policy, while the Nashville Admissions Insurance holds the remainder.
Over the winter, the ODF and Lloyd’s of London will negotiate a new policy and new premium, which must be approved by the Legislature and Governor Kate Brown.
The number and size of fires has increased in the past decade. But the state has expanded its capabilities in the field of fire prevention and control. Both factors will affect the cost of the new policy.
This one-of-a-kind insurance policy is no stranger to Lloyd’s of London. It started in 1686 as a company selling freight insurance from a table in the back of a coffee shop near the River Thames in central London.
Since the Parliament Act 1871, Lloyd’s has turned into a pool of stakes. Today Lloyd’s of London has about 90 members – corporations, mutual funds and a small number of individuals.
Policy payments are sourced from a risk pool of approximately $48 billion. The wide spread of risks allows Lloyd’s to mute the impact of costs on any member.
Profit sharing is also done, with members benefiting from premiums paid on the majority of policies that have not taken effect in any given year.
Lloyd still sells shipping insurance and is based in the same neighborhood as the coffee shop.
Most of its business worldwide is handled online, but Lloyd’s is giving a nod to its past by maintaining its London underwriting room, with its 197-foot-tall atrium.
Over the decades and centuries, Lloyd’s has branched out into almost every corner of the insurance market, including some of the outlandish, highly publicized policies that have made the company’s name known worldwide. It’s insured on everything from the legs of actress Betty Grabble in the 1940s to the hands of Rolling Stones guitarist Keith Richards.
In most years, Lloyd’s generates solid profit for its members. But the COVID-19 pandemic has presented two years of extraordinary challenges. Coronavirus-related policy payments exceeded $8.5 billion in 2020, the most of any single event in Lloyd’s long history.
Insurance policies are based on calculations of potential risk derived from decades, even centuries, of actuarial statistics. But COVID-19 has been “black swan” – a term for a rare, unseen catastrophe of legendary magnitude.
The pandemic has flooded Lloyd’s with claims, prompting pool investors to absorb a loss of $1.24 billion in 2020. But Lloyd’s isn’t just selling insurance, it’s buying it. Lloyd’s investors limit their ultimate financial exposure by purchasing annual “reinsurance” policies that begin when costs escalate above a certain rate or level.
While the ODF will have to wait to meet with Lloyd’s to discuss the terms of the next policy, Gersbach said the state hopes to celebrate the 50th anniversary in 2023 of the state’s “prudent relationship” with Lloyd’s of London.
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