Parametric hurricane insurance program to cover Mesoamerican Reef

The Mesoamerican Reef system which lies in the Caribbean Sea, touching the coasts of Mexico, Belize, Guatemala and Honduras, is set to benefit from an innovative parametric insurance program to protect the reef and communities that rely on it against hurricane impacts.

Dubbed a “world-first post-hurricane insurance protection”, the parametric insurance product will see payouts triggered by hurricane intensity.

The measured intensity of a hurricane will be converted into an estimate for the extend of damage to the reef, using a reef specific risk model.

A group policy will cover a number of pilot reef sites,in in Mexico, Belize, Guatemala, and Honduras, with a bespoke pay-out structure designed to represent the cost of response at each reef site at different damage levels.

The initial pilot phase of this parametric reef insurance programme is expected to enhance the climate resilience of almost 2 million beneficiaries.

Insurance and reinsurance brokerage Willis Towers Watson (WTW) is collaborating with a number of parties on this initiative.

The parametric insurance project has been co-funded and implemented by Willis Towers Watson and the Mesoamerican Reef Fund (MAR Fund), a regional financing mechanism for large-scale maintenance, conservation, and restoration of the reef system.

The MAR Fund will be the policyholder of the parametric insurance programme.

The InsuResilience Solutions Fund (ISF), managed by Frankfurt School of Finance and Management and funded by Germany’s KfW Development Bank, has signed a grant funding agreement to support the insurance programme roll-out.

Meanwhile, the Ocean Risk and Resilience Action Alliance, with funding from Global Affairs Canada, has assisted with the preliminary design of the insurance mechanism.

The Mesoamerican Barrier Reef System is vital to the lives and livelihoods of communities near to it.

The reef system is listed as critically endangered by the IUCN Red List of Ecosystems and is home to 65 species of coral and more than 500 species of fish, as well as many other protected marine species, while it also acts as a natural protection barrier to storms and how they might impact other endangered environments such as wetlands and mangroves.

John Haley, chief executive officer of Willis Towers Watson, commented “In 2018, we launched the Global Ecosystem Resilience Facility at the World Ocean Summit in Cancun. We are delighted to be back in central America, partnering with the MAR Fund and supported by the InsuResilience Solutions Fund, to build resilience of the Mesoamerican reef and its communities. Marine ecosystems may be ‘free’ public goods, but their active maintenance is essential in sustaining their health and value. This programme helps us learn how insurance can provide a unique shared governance framework to manage reefs and other vulnerable natural ecosystems.”

María José González, executive director of MAR Fund added, “This collaboration is a great opportunity for the MAR region. We see the insurance model as a risk management tool that will provide immediate funds for reef restoration, thereby contributing to strengthening coastal resilience, and to the recovery of the MAR and the environmental services it provides. MAR Fund will be the policyholder and will manage the pay-outs. We will work closely with national governments and other partners and stakeholders to build the needed capacities for emergency response and preparedness.”

Annette Detken, director of the InsuResilience Solutions Fund, also said, “This partnership combines the expertise of local partners and the insurance sector, ensuring that products are developed according to the needs of the vulnerable population. Our grant will co-fund the development and implementation of this innovative insurance product insuring coastal ecosystems that provide much needed services for local communities. We believe this insurance solution could serve as a model for other countries seeking to protect important natural assets, like coral reefs.”

Simon Young, a senior director in the Climate and Resilience Hub at Willis Towers Watson further explained, “We are grateful to the ISF for supporting the design of the MAR Insurance Programme, and most importantly, funding its implementation. Tangible examples like this demonstrate the possibilities for innovative financing to support practical action to build the resilience of crucial ecosystems and the communities, livelihoods, and biodiversity they support, and to unlock large-scale investments in natural assets which are critical to address loss of biodiversity and increasing impacts of climate change.”

This isn’t the first parametric insurance product to protect a reef system, but it does look set to be the largest such programme so far.

Previously, the Mexican Reef Protection Program, an initiative that leverages parametric risk transfer and reinsurance capacity for a section of the Mesoamerican reef in the state of Quintana Roo on the Yucatan peninsula was first established by the Nature Conservancy back in 2018, working alongside reinsurance firm Swiss Re.

That arrangement was then renewed in 2020 with the help of Global Parametrics, the parametric and index-based disaster risk transfer company, in partnership with global reinsurance firm Hannover Re.