Parametric insurance for forest fires: the ART of the possible

Parametric insurance offers a novel approach to financial risk management for wildfires, with payouts triggered by objective measurements, or model outputs, rather than traditional loss assessments. WTW has pioneered the adoption of parametric forest fire insurance, leveraging satellite measurements of changes in reflectivity over vegetation, thermal anomaly detection, and fire perimeter determinations from independent fire agencies.

We present mock examples of how extreme wildfires may trigger parametric insurance payouts, specifically applied to forested areas in the 2025 Los Angeles fires. This is in the context of how the insurance industry has adapted to extreme wildfires over the past decade. We also demonstrate how fuel reduction can significantly mitigate wildfire risk, offering critical insights into the interplay between risk reduction strategies and insurance.