New parametric reef insurance & resilience product to be developed

A new initiative to develop a parametric insurance product to protect and enhance the resilience of coral reefs and the communities that rely on them is being developed by Willis Towers Watson through its Global Ecosystem Resilience Facility (GERF) and the Mesoamerican Reef Fund (MAR Fund).

An agreement has been reached that will see the pair working on an insurance and risk transfer model for coral reefs specifically for the four countries of the MAR Region; Mexico, Belize, Guatemala and Honduras.

A concept for the project has been submitted to the InsuResilience Solutions Fund, which is part of the InsuResilience Global Partnership and managed by KfW, the German government-owned development bank.

The project will see a parametric insurance model for reefs developed with the specific goals of supporting early response and restoration after climate, weather and catastrophe events.

The aim is to reduce long-term damage to coral reefs and speed up their recovery, while improving their resilience and creating a natural capital value in the Mesoamerican Reefs. The parametric reef insurance product is set to be developed and implemented at roughly seven locations across the four countries of the MAR Region.

Reefs are a vital part of coastal natural infrastructure and they are at risk globally from weather and climate related catastrophe events.

Therefore, providing risk capital to support the resilience and recovery of reefs is aligned with the catastrophe and weather risk focus of ILS and alternative reinsurance markets, while the parametric triggers make for simpler modelling and payout terms.

Reefs provide important resources and resilience to local communities, in the way of food security, biodiversity, tourism and coastal infrastructure.

The coastal infrastructure aspect also helps to maintain the resilience of coastal communities against storm surge and other flooding events as well, hence creating a natural capital value to the reefs and transferring the natural risks they face to insurance and reinsurance capacity not only supports the reef, but can also lessen coastal losses.

While the practical value of reefs has been understood for some time, the ability to model and understand their financial or natural capital value is a more recent development and is now leading to some interesting risk transfer initiatives, such as this one.

Willis Towers Watson likens this to current parametric insurance products for crops and cattle, saying that “Insurance for reefs is an innovative financial mechanism that can contribute to reef restoration and recovery.”

The broker and adviser launched its Global Ecosystem Resilience Facility last year, hailing it as an insurance facility designed to help strengthen the resilience of ecosystems and their communities through the use of efficient risk transfer and saying that in future catastrophe bonds could feature in its work.

A separate initiative is also looking at the issue of coral reef risk transfer and resilience, involving reinsurance firm Swiss Re and The Nature Conservancy.