Coral Reef Insurance: “Parametric Protection of The Reef-Builders”


As the world grapples with the harsh and bitter realities of climate change, there is fresh impetus to realise the advantages of nature capital and nature-based resilience. With the embrace of critical technological advancements specifically in data collection and verification, the insurance industry has a major opportunity to provide novel solutions based on parametric modelling. The industry has already made great leaps in extending protection to a key provider of nature-based resilience, coral reefs.

Coral reefs are present in more than 100 nations and territories, with nearly a billion people depending on reefs for their livelihoods. Healthy coral reefs contribute a wealth of benefits to communities, stretching beyond the provision of food and medicine to economic benefits in the billions. According to Deloitte, the Great Barrier Reef has an estimated yearly economic contribution of US$6.4bn, and a total value of US$56bn.

Nevertheless, the UN Environment Programme (UNEP) estimates that 50% of corals worldwide have been lost in the last 30 years alone and the Intergovernmental Panel on Climate Change (IPCC) cautions that 90% of reef-building corals could be lost by 2050 even if average temperature rises are suppressed to 1.5°C.

Indemnity vs. parametric insurance

Based on the principle of indemnification, a traditional insurance policy or a contractual promise to pay becomes enforceable when a policyholder suffers loss from an insured event. The consummation of an insurance policy occurs thereafter the occurrence of an event resulting in quantifiable loss.

Quite clearly indemnity insurance is an indispensable component of society tracing its roots back centuries. Whilst coverage is far and wide, the protection gap between losses incurred and the losses recovered continues to remain a cause for concern.

Borne out of technological advancements and targeted risk modelling, is parametric or index insurance.

Parametric insurance plays a markedly different role to indemnity insurance in that it is the guarantee of a pay-out based on the occurrence of a triggering factor rather than the actual loss suffered, usually measured against an agreed parameter (such as water temperature). In simple terms, once a pre-determined threshold has been met, the policy is triggered, and payment is made. Rooted in resilience, parametric insurance provides a cash injection to insureds prior to the damage actually occurring, thereby arming insureds with the necessary means to mitigate losses on the horizon. Speed is a key advantage of parametric solutions in that the time expended in proving loss is dispensed with.

Parametric insurance operates on the basis of a pre-agreed index or set parameters which are informed by objective and measurable data. In this way accurate data is a key component of parametric insurance. With the expansion of parametric products expected, parametric insurance is seen as a highly effective tool in the management of natural catastrophes given the easily accessible nature of objective weather-related data. Improved hazard modelling equips parametric insurers with the necessary tools to consider when a policy may be triggered.

Far from displacing indemnity insurance, parametric insurance has its own role to play and thereby complements the former in allowing the insurance industry to perform as a well-rounded solutions provider. If sceptics ever needed justification for the expansion of the industry into parametric solutions, pay-out under the world’s first coral reef insurance policy in Mexico should do the trick.

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Success story – Mesoamerican Coral Reef Insurance

Ecologically speaking, coral reefs are of paramount importance, acting as both the nursery waters and bustling cities of the oceans. Spanning up to 6,000 deep-sea and tropical species of corals worldwide, the reefs they build through depositing limestone substrate, although only covering 0.1% of the ocean floor, are where 25% of all marine organisms begin life. Losing these nursery waters could see the depletion of pelagic fisheries stocks through trophic cascade ocean-wide.

As the rainforests of the oceans, coral reefs, along with other ocean plants, produce half of the oxygen we breathe. Reef-building corals greatly benefit local communities who live on coral atolls, whilst providing natural ocean buffers and sea wall defences.

Coral reefs serve nearly a billion people with a range of ecosystem services including fisheries production, tourism revenues and sources of medicine. The novel chemistries found on coral reefs fight cancer, with cancer-fighting Prostaglandin and Bryostatin found in Sea Fans and Coral Rhizomes, respectively.

The economic importance of coral reefs is substantial. The National Oceanic and Atmospheric Administration (NOAA) estimates that all coral goods and services worldwide contribute around US$10tn annually, with US$3.4bn in the US alone. 

It is no wonder why the Quintana Roo government sought parametric protection of the Mesoamerican Reef in 2018, setting up the Coastal Zone Management Trust to oversee conservation efforts.

The Nature Conservancy initially joined forces with Swiss Re to investigate the feasibility of insuring the Mesoamerican Reef. Beyond the reach of indemnity insurance given the need for a speedy pay-out, a parametric policy was seen as a viable solution.

Subsequently in 2019 the Trust took out a novel parametric policy providing a contractual promise to pay-out if wind speeds reached greater than 100 knots in an area of 160km stretching across the reef. Following renewal and the reinsurance by Hannover Re, these innovative efforts came to fruition in December 2020 after Hurricane Delta stirred up wind speeds of 100 knots when it hit the coast of Quintana Roo on 7 October 2020. The speedy pay-out of $800,000 was crucial to allocate resources to repair the Reef.

This is a big win for the insurance industry in protecting nature-based resilience, especially in the wake of climate-related disasters which are only set to increase.

Restoration of Coral Reefs

Hurricane Delta and coral reparation efforts

Hurricane Delta caused US$2.9bn in damages in the US, the death of six people in Mexico, and considerable damage to the Mesoamerican Reef. The Reef provides yearly ecosystem goods and services worth US$2.6bn, so the parametric pay-out was a vital lifeline enabling the response of National Commission of Natural Protected Areas (CONANP).

The response involved 80 Reef Brigade members comprised of local community and marine tourism sector volunteers who are trained to repair hurricane-struck coral reefs. In the first 11 days of the reparatory response the volunteers in the Puerto Morelos Reef National Park returned 1,200 larger corals to their former upright positions, and transplanted almost 9,000 broken coral fragments and stalks, fostering the growth of new coral colonies. By December 2020, these numbers had reached 2,000 and 12,500, respectively. Synchronised reparatory operations also occurred in Cancun, Nizuc and Isla Mujeres Reef National Park.

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This reparatory effort was both ecologically and economically significant. A 2019 report estimated that hurricane protection afforded by the Mesoamerican Reef during 2007’s Hurricane Dean prevented damage to buildings and hotel infrastructure of US$42mn and US$20.8mn, respectively; equivalent to damage reduction of 43%.

Without a healthy Mesoamerican Reef, the annual US$10bn tourism economy of Quintana Roo could be placed at considerable risk.

Future of climate and nature-focused insurance policies

Now, of vital importance is that insurers embed climate-related risks into their overall governance and risk management frameworks, honing quantitative risk modelling and scenario analysis of perils affected by climate change. The rising frequency and variety of perils, coupled with the ambiguity of climate change, could make historical loss data that catastrophe models previously relied upon useless for future loss predictions. Consequently, in a climate-induced shift, many (re)insurers are collaborating with climate scientists to understand the latest data and loss control developments.

These climate-related shifts have seen insurers diversify their offerings with innovative, climate-resilient insurance products. Like with the Mesoamerican Reef Policy, cutting-edge parametric policies are increasingly used to address climate-related risk, such as droughts, floods and extreme weather. In tandem with these innovative products, insurers are making use of technology involving satellite imagery to monitor crop patterns and soil quality to identify early signs of drought or crop failure, in addition to the activity of hurricanes.

With the UNEP, NOAA and the IPCC confirming the rise of oceanic temperatures, increasing both coral bleaching and the frequency and severity of hurricanes, the hope for conservationists and insurers responsible for the Mesoamerican Reef Policy is that it will be replicated across the world’s tropical waters; insuring not just coral reefs but also mangroves, salt marshes and fish stocks that find difficulty in securing indemnity insurance coverage. Notably, the Nature Conservancy December 2020 report outlines the viability of deploying parametric products for hurricane-threatened coral reefs in Florida and Hawai‘i, whilst considering additional diversification of these parametric products to insure against marine bleaching and sedimentation from stormwater runoff in Hawai‘i.

Closing remarks

Both the public and institutions are taking an environmental stance; especially in light of Covid-19 and the “green recovery”. Every instance of climate action and legislation is about improving lives, creating jobs, greenifying cities, and protecting ecosystems. With the recent publication of the Dasgutpa Review in the run-up to the UN’s COP26, highlighting the economic importance of natural biodiversity, the forming of the Taskforce on Nature-related Financial Disclosures, and the staunch efforts of groups like the Coral Reef Task Force, we are living through a great societal transition and transformation to a greener world made possible by innovative insurance solutions.

With any luck, we might see the benefits from this green transition within our lifetimes.

Nigel Brook is facilitating an Insurance hackathon with The [Chancery Lane] Project and InsuranceERM, which will focus on, among other things, finding innovative insurance solution that could enable societal transition to Net Zero world. The first session will take place on 26 April 2021. If you are interested in participating, please sign up here:

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