Insurance and Forest Rotation Decisions Under Storm Risk

Forests are often threatened by storms; and such a threat is likely to rise due to climate change. Using private forest insurance as a vehicle to fund resilience and adaptation emerge as a policy recommendation. Hence the forest owners would have the possibility to consider insurance when defining their forest management practices. In this context, we analyze the impact of the forest owner's insurance decision on forest management under storm risk. We extend the Faustmann optimal rotation model under risk, first, considering the forest owner's risk preferences, and second, integrating the decision of insurance. With this analytical model, we show that as the insurance coverage increases, the rotation length increases independently of the forest owner's risk aversion. In addition, we identify some cases where it may be optimal for the forest owner to not adopt insurance contract. Finally, we prove that a public transfer, reducing the insurance premium, may encourage the forest owner to insure.