Design of insurance contracts using stochastic programming in forestry planning

Abstract

This work addresses a tactical planning problem faced by a forestry firm, deciding which timber units to harvest and what roads to build to obtain the greatest possible benefits. We include uncertainty in prices by means of utility theory. This enables solutions to be found that the firm finds preferable to those obtained when risk aversion is ignored and makes it possible to design insurance contracts that benefit the firm while also being attractive to an insurer. Two types of contract are designed; one dependent on the firm’s operating result and the other independent of it. Metrics are then developed to quantify the benefits conferred by a contract, demonstrating that the latter contract type dominates the former. These results are then illustrated by applying them to a simplified planning problem of a forest owned by the Chilean forestry operator Millalemu.