Data & Processing

1. Loss data 20+ years for managed forests due to fire & wind Annual area losses Loss area per event (day, date, area lost) Review trends particularly over the last 10 -15 years Set parameters and run the model for 10,000 reiterations Review results for mean modelled loss cost Data & Processing • ForestRe price risk to best practices using simulations

2. Model the Risk • Model risk with input loss parameters and whether includes catastrophe event • Monte Carlo simulation – a forestland fire loss example (shows annual area lost x frequency). This represents large areas. • For small growers results losses can be binary; 0 or 100%. • This provides a curve showing distributions; i.e. probability of losses of any given size and their frequency

3. Loss Event Analysis • Californian fire size on forested land: • 93.4% under 20,000ac

4. Pricing Risk • Model produces mean ‘ground-up’ loss cost on an area basis. • Steps include a loading for: • Catastrophic event - load the result if not within original data • Give credit for items that reduce loss to insurer: • Value of salvage (value of damaged timber or non-emitted carbon) • Retained risk by insured – the deductible • Maximum loss / modelled loss or desired limit of cover • Commercial pricing • Adjust for target ratio of losses to premium (loss ratio)

5. Submitting Risk to Lloyd’s • Making the case to accept the risk • Technical analysis results • Submission of data and model results • Client profile • Large corporate or scheme, group product • Client due diligence – land title, reputation, partner insurers • Current conditions • El Niño / La Niña cycle status • Precipitation and temperature anomalies, wind storm tracks • Pre-existing conditions (existing fires in vicinity), fires season or hurricane season

6. Insurance of Carbon • Understanding forestry carbon sector & Insurance Source: CRM report on California Fires 2009

7. Compliance Market CDM forest carbon market under Kyoto Protocol 1997 Afforestation and reforestation eligible Possibly REDD (Reducing Emissions from Deforestation and Forest Degradation) Forestry not included in the EU ETS (European Union emissions trading system) 30 year projects with 5 yearly verifications of carbon stocks (or 20 yr renewed twice) A bureaucratic process prior to carbon credit issuance. Three or four projects approved to date, may be 100 awaiting approval Produce tCERs(temporary certified emission reductions) Carbon Trading Markets • Source of 17.3% global emissions (IPCC 2007 report),

8. Voluntary market (VERs, VCUs) Afforestation and reforestation Carbon yield from sequestration vs ‘base line’ status Carbon seen as temporary REDD starting under voluntary market and pending outcome of COP 15 credits could be tradable in compliance schemes or as part of national compliance” Carbon yield from avoided emissions (forest loss) vs ‘base line’ country historic loss Voluntary Carbon Enterprises • A less bureaucratic route forward. • International standards for voluntary carbon established: • Voluntary Carbon Standard (VCS 2007) no approved projects – yet! • Climate, Community & Biodiversity Alliance • Word Bank Biocarbon Fund (MOSAIC)

9. Entry Point for Insurers VCS VCS • To provide cover, insurers require detailed project information • All markets have rigorous procedures and documentation • To design insurance products we require project data to determine the answer to key insurance criteria • This data, we assume, is provided by the project validation, monitoring and emissions reduction reports • Process includes risk assessment and holding reserve for losses PDD & Title Project Validation Monitoring Report Project Implementation Emissions Reduction Verification Report Design phase VCU Certification Statement VCU Title Provided to VCU Registry VCU Credits Project with Certified volume of VCUs Policy inception

10. Key Insurance Criteria for Carbon • Insured interest………………Carbon as CO2e • Location, area & spread of risk Latitudes & longitudes • Total Value……………………US$ or tonnes CO2e? • Basis of valuation…………….Voluntary carbon mkt price information. What other costs to be protected (fire fighting)? • Basis of indemnity……………How is the loss (t) calculated? • Salvage ………………………. What carbon remains post event? • Perils for insurance…………..Fire, wind, ice… & loss data? • Limit of cover required………Total Value? Loss limit? • Retained risk (deductible per loss)US$ or tonnes CO2e?

11. Key Questions for Carbon Project • Insured interest is Carbon as CO2e & Insurer’s liability • What is the carbon production / stock profile over years • At what rate is it generated if sequestered? • What proportion is above ground, below and in products • How are these tracked/monitored and which are at risk? • What impact will risks have on these carbon stocks - severity and frequency • How is damaged carbon stock maintained after a loss event to minimise loss (ref. CCAR)? • What proportion of lost carbon can regenerate after the loss over the period of a multi-year policy (belongs to insurers?)

12. Other Data & Conditions Insurers require • All locations, areas, boundaries, carbon stocks and base lines (historic ‘reference area’ emissions rates if REDD) • Management details • Risk mitigation plans on site and post loss • Community involvement details as this indicates a good risk profile if all stakeholders are involved. • For early projects insurers will want to review Verification and Certification Statements

13. Carbon Insurance Wish-list • Insurers understand the common idealised requirements • Objectives include • Insure against multi-perils (political, credit, climatic hazards, theft, pest and disease etc.) • Guarantee the delivery of a forestry carbon credit at a given time in the future. i.e. true indemnity or ‘carbon for carbon’ (permanence) • Long term policies (50+ years) • & pay premiums with carbon credits • Benefits • Enable projects to have smaller buffers so improving early cash flows • Raise value of forestry carbon due to fungibility with carbon in trading systems

14. Initial Insurance Product 2009 • In practice, a probable initial insurance cover: • Term • A guarantee of delivery of a forestry carbon credit within a possible (rolling) 5 year term • Insured perils • Limited initial peril cover: natural hazards + political, credit (if major project investor) • Premiums • Pay premiums with carbon credits at pre-insured values • Risk annually assessed to minimise uncertainty in risk pricing • Premiums loaded for catastrophic combination of events at 1:100 to 1:250 year occurrence

15. Prerequisites - Carbon Delivery • But also insurers need • A critical mass of forestry projects to provide a sufficient buffer pool for liabilities • Over time will build own insured portfolio • Buffer pools if to CCBA and VCS standards can be global (i.e. fungible with high standard forestry projects) i.e. true indemnity • What is acceptable to the carbon market will vary by standards applied to projects and important not to ‘over-indemnify’ • Ability to monitor the forest for all forest disturbance as deforestation and degration (by satellite monitoring) • to acquire evidence of stock changes and when insurable event has occurred

16. Other Pre-requisites & Ideas • With Planning Insurers could: • Guarantee delivery • Requires options on a host forestry carbon project stocks • Permanence requires longer term policies – linking mechanisms • Become buffer manager • Either the primary buffer, or a buffer in excess of the registry pool volume • Advise on project buffer volumes for VCS or CCAR • Become carbon traders • Hold and trade VCU • Receive carbon on basis of uninsured value • Sell carbon as insured • Calculate premiums as tonnes of uninsured VCU • Rebate some carbon tonnes to project as insurer’s carbon pool increases

17. Forest Carbon Product Ideas • Conventional Cover to Maintain Project Financial Sustainability Following a Loss • For VCS or similar standard projects • Not a carbon delivery guarantee • Covers costs of debris removal, replanting, re-verification costs, fire fighting • Annual policy, named perils being natural hazard and Political risk • Normal insurance structures according to size (Value) of project • Premium as currency

18. Forest Carbon Product Ideas • 2. Carbon Delivery Guarantee • For VCS or similar standard projects • Provides carbon delivery guarantee & optional costs • Optional cover: costs of debris removal, replanting, re-verification costs, fire fighting etc. • Insurer insures the delivery contracts of the project as committed • Insurer works with registry • Determines size and disbursement of pool / buffer carbon and has first call on carbon within pool • Losses in excess of pool are delivered through other pools within same registry or across registries • Insurance could be project by project • Premium as VCUs at ‘uninsured price’

19. Forest Carbon Product Ideas • 3. Carbon Delivery Guarantee Excess of Registry Pool • For VCS or similar standard projects • Multi year, multi-risk policy • Provides carbon delivery guarantee & optional costs cover • Insurer insures the delivery contracts of all projects within a registry buffering system, but in excess of the Registry carbon pool • Works with Registry to identify external forest carbon sources suitable for indemnification of pool losses (ideally other registries) • External pool carbon sources will be global • The insurance would thus be for a group – the Registry project portfolio • Lower premium due to greater spread of risk within, and retained risk by the Registry. • Premium as VCUs at ‘uninsured price’

20. There is a growing capacity in international markets for insurance of forestry – provides risk spread and generally non-correlating risk But work to do Insurance skills are being enhanced season by season with influence of ForestRe & others within the industry International markets need to educate local insurance markets (risk assessment & pricing) extend the message that there is a risk appetite for for well-run forest enterprises build well dispersed forest portfolios to provide added value to investors Make routine use of standard satellite monitoring (sarmap & others) for monitoring change post loss claims measurement Conclusions 1 Insurance

21. Care: Fire & Wind severity & frequency rising = catastrophe losses Every investor should plan to manage the ‘cat.’ exposure Fire protection plans required regardless of region Purchase catastrophe insurance for the fire or wind risk at rates that may reduce top returns but also reduce return volatility and risk Conclusions 2 – Risk Trends Chisholme Fire Alberta Canada: Permission of Forest Protection Division of the Province of Alberta

22. There is great interest by the insurance sector to participate in carbon ( & forestry) Now seeing carbon as a potential growth business line But work to do Finalisation of registry rules and standards Clarification of Registry procedures Some commonality between standards Development of sufficient eligible certified forest carbon projects to provide sustainable portfolios Insurance has a big role as the market gains sufficiently liquidity to enable common hedging mechanisms (futures etc) Conclusions 3 Carbon

23. Bringing Security to Forestry Investors Worldwide: A View from ForestRe phil.cottle@forestre.com Gordon.Steward@forestre.com www.forestre.com