Nature Conservancy pilots insurance fund for coastal resilience

by Artemis on July 19, 2017

The Nature Conservancy (TNC), a leading global nature conservation organisation, is working on a pilot project that will design and test an insurance mechanism for coastal resilience which will leverage private capital structured in a fund format and with underlying parametric insurance triggers.

Coral reef imageIt’s a project that has been in the works for a couple of years now, and having spoken with the TNC on subjects ranging from the capital market appetite for risk transfer, catastrophe bonds, resilience bond concepts and the abilities of ILS market structures a number of times  it’s encouraging to see that the work of The Nature Conservancy on this subject beginning to take shape.

With coastal regions threatened by the potential for rising sea levels, and the changed use or damage of natural coastal protection such as reefs, mangroves and wetlands increasing the risk to coastal communities, there is an opportunity to leverage the best of insurance, the capital markets and resilience practices to create a way to finance better protection or restoration of the natural assets protecting our coasts.

The initiative, which TNC has named the Reef & Beach Resilience and Insurance Fund, will feature “the first ever insurance policy on nature” TNC explains.

In pilot form it will cover a stretch of coral reef and beachfront, structured to become the first insurance mechanism using the protection afforded by reefs to create an innovative financing opportunity for reef restoration and protection, with the end-goal being to better protect coastal economies and the livelihoods of people living there.

With an estimated 840 million people around the world living at direct risk of coastal flooding, according to TNC, the economic health of the communities is linked to the health of their coastal ecosystems and the protection they afford.

Natural infrastructure, such as reefs, mangroves, sand dunes and wetlands, all provide a form of protection for the coastal communities, protecting lives, property and businesses from the ingress of the sea.

TNC says that these natural coastal infrastructure features can provide disaster protection, with their data showing that a healthy coral reef can lower the energy from a wave by 97% before it hits the shore, while 100 meters of mangroves can result in a drop in wave height of as much as 66%.

The pilot project seeks to put in place an insurance mechanism that will leverage the protective services of such natural infrastructure, and ensure their restoration after a major storm.

“One of the most promising new developments to maximize the value of nature is the possibility of putting an insurance policy on habitats like reefs and beaches,” TNC explains. “By combining insurance and new science, we can protect and improving the health of reefs and beaches so they can continue to protect us.”

Reserach has shown that the property exposures that are protected by natural infrastructure are significant. Around $6 billion of “built capital” is protected against flooding annually by coral reefs, research shows.

As well as protecting against disaster, reefs and natural infrastructure are also major sources of revenue for local communities and governments, particularly from tourism, so their value is much greater than just on the protection side and not even considering the key role this infrastructure plays in our environment as well.

The fund itself is not an ILS fund, it’s not a pure insurance risk as such, but it is an opportunity that may prove of great interest to the same institutional investors that back ILS funds in the future, if efforts such as this can gain scale.

TNC has designed the fund; “To bring new private capital to coral reef and beach protection and restoration—and demonstrate a replicable way to monetize the protective services of the reef.”

Of course by utilising the reef for protection and monetising that, it’s also encouraging resilience and reef maintenance which is also positive for the tourism and hotel sectors that will be the ultimate beneficiaries of this pilot project.

The fund will pay a premium for a parametric insurance policy covering a designated piece of natural infrastructure, such as a stretch of coastline or beach.

The fund will act as a self-insurance pool when the beach or reef (or whatever natural infrastructure is covered) are damaged by a qualifying event such as a storm but the trigger for the parametric policy has not been breached.

The fund will pay for the “science-based restoration and maintenance” required to repair and ensure the ongoing health of the natural infrastructure if triggered.

It’s to be assumed that investors in the fund will be compensated up to any full payout through premiums paid by a sponsor of sorts, where the restoration and maintenance of the covered natural infrastructure is required.

How investors would be compensated during the self-insurance phase, where some damage needs repairing is not fully clear, but this could be funded in the same way by potential sponsors, so governments, municipalities or corporations that are exposed to the risk of natural infrastructure becoming severely damaged.

TNC said that the Reef and Beach Resilience and Insurance Fund (RRIF) pilot is being executed with the help of a leading global reinsurance company and support from The Rockefeller Foundation.

With the pilot project focused on resort towns in Cancun and Puerto Morelos, Mexico, TNC is also working alongside Mexican entities, government agencies and academic institutions, as well as eliciting feedback from stakeholders.

TNC hopes this approach will offer; “A scalable way vulnerable coastal communities can strengthen their physical and financial resilience against climate change.”

The insurance fund is designed to; “Coordinate and unlock sustainable private sector capital for the protection and restoration of coral reefs,” TNC says.

The ongoing pilot project is expected to demonstrate a way that coastal natural infrastructure and ecosystems that support tourism and local economies can be protected and insured, while offering an associated source of funding for the ongoing maintenance and protection of coastal infrastructure.

“With the help of partners like the tourism and insurance industries, a new market of insurance products that protect coastal and natural communities while sustaining tourism economies would be possible,” TNC explains, but the organisation adds that “The time to move on this opportunity is now, though, because we can’t afford to do nothing. Literally.”

As with efforts such as the attempts to fuse the catastrophe bond with resilient infrastructure projects, there remains insufficient information for investors to really understand this project at this stage, and whether they would want to invest in it.

However, the fact this has a catastrophe and weather insurance-linked return component, can be considered an impact investment, and is akin to financing infrastructure, while still being relatively uncorrelated with the whims of financial markets, should make any successful effort such as this a very attractive asset class in the future.

Plus let’s face it. The insurance, reinsurance and ILS or risk capital markets are likely the best qualified to support efforts to improve coastal resilience, given their ability to understand the underlying risks that coastal communities face.

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