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Insurance for Ecosystem Services Resilience: Lessons from the Mesoamerican Reef Insurance Program

By Sangita Keshavan and Jamie Pollard | September 27, 2021

Following the launch of the Mesoamerican Reef Insurance Program, this article shows how the tools and techniques of insurance can contribute practical solutions to protect our critical ecosystems.
Environmental Risks
Climate Risk and Resilience

In partnership with the Mesoamerican Reef Fund (MAR Fund), and supported by the InsuResilience Solutions Fund (ISF), Willis Towers Watson recently announced the launch of a parametric insurance program to support recovery of the Mesoamerican Reef following hurricane impacts. This article provides a closer look, showing how the tools and techniques of insurance may be leveraged to unlock and protect the value of natural capital and associated ecosystems services, illustrated through reference to the MAR Insurance Program.

Rainforests of the sea: the value of coral reefs

Coral reefs are intricate marine ecosystems, and their growth, survival, and ability to flourish rely on the codependences between resident organisms and their surrounding environment. The reef ecosystems are built around the limestone skeletons of millions of coral organisms known as coral polyps. The polyp process of converting seawater into limestone rock takes time, and the hard reef structures that support the present-day ecosystems are products of thousands of years of continued reef-building. This characteristic also makes it difficult for the reef to recover from damaging events, and coral reefs today are more fragile than ever as a result of human activity and the impacts from climate change.

Often called “rainforests of the sea,” coral reefs are biodiversity “hotspots.” They are amongst the world’s most ecologically important habitats and support an incredible array of flora and fauna. Coral reefs are also a critical natural infrastructure for many communities and nations. The varied tangible benefits that coral reefs support, such as reducing water levels and wave energy during extreme storm events, make them of paramount importance for coastal resilience and risk reduction. Reefs are also crucial for tourism, recreation, and subsistence for the communities they support. They provide food and income, and their recreational benefits support entire tourist destinations.

The intrinsic and economic value of coral reefs depend fundamentally on their continued maintenance and health. To protect a coral reef is not a simple task. They are highly vulnerable to numerous hazards, ranging from physical impacts (examples: tropical cyclone winds, marine heatwaves, ocean acidification), to biological impacts (invasive species, disease), and social impacts (overfishing, pollution, recreation). Because these delicate ecosystems are extremely sensitive to changes in their environment, a comprehensive coastal management strategy requires a complete understanding of the risks associated with such varied hazards.

Many of these risks are indeed exacerbated by anthropogenic climate change. For example, a recent review found that atmospheric warming will likely lead to an increased proportion of high-severity tropical cyclones and associated damaging windspeeds, storm-driven flooding, and extreme rainfall events. Many reef systems have adapted to withstand (and even benefit) from extreme event impacts, but the changes in the severity and frequency of these events threaten to exceed recovery thresholds. For instance, persistent snapping and scattering of coral tips, repeated sand burial, or extreme nutrient influxes from storm-water run-off could all inhibit growth and regrowth of reef systems. Moreover, recovery thresholds themselves are changing due to the compounding effects of increasingly sub-optimal temperatures and water chemistry stemming from ocean warming and acidification. The ecosystem services that the reefs deliver are then also impacted, and they may decline significantly. For example, a 2018 study on the value of the Mesoamerican Reef (MAR) indicates that if reefs continue to decline in the MAR region, their per-annum value could fall by $3.1 billion by 2030.

Reef restoration studies have also demonstrated the value of immediate damage assessment, cleanup, re-attaching of broken coral, and out-planting of nursery-grown coral to mitigate some of the long-term damage caused by hazardous events and to boost recovery of the reef. However, such activities can be costly, and funds to support such efforts are rarely available on the short timeline required. The insurance industry is well placed to fill this funding gap. The industry can leverage its specialization in the prepositioning of finance to cover recovery costs to address the challenges associated with ecosystem resilience, using the tools and techniques it originally developed to protect the built environment.

Turning the tools and techniques of insurance to ecosystem protection

Quantifying the value of natural capital and associated ecosystems, and representing the value of ecosystems in monetary terms, is crucial. It is the first step toward protection, as it provides policymakers and the finance sector with the ability to include ecosystems in a cost-benefit analysis. Furthermore, it allows the value of natural capital and ecosystem services to be captured in other accounting, economic, financial, and even psychological frameworks, and makes the necessity of protection more tangible. 

Representing the value of ecosystems in monetary terms allows its capture in decision-making frameworks.

Numerous studies have sought to quantify the value of coral reefs. The first global assessment of the direct and indirect benefits they provide to human welfare suggested a minimum value of USD 0.5 trillion per year. This number was later revised upwards to USD 9.9 trillion per year (both 2007 USD values). These economic valuation studies suggest that the considerable value afforded by these habitats has been well-known for over two decades. Still, effective mechanisms to translate these values into ecosystem protection strategies are few and far between.

In order to unlock finance for the protection of any type of asset, there must first be an understanding of that asset and an ability to robustly assess the risk to which that asset is exposed. Risk understanding and assessment form the foundations of the modern insurance industry. Since the age of antiquity, society has concerned itself with the risk of catastrophic events and the methods by which various entities can arm themselves against loss. Today, we have highly sophisticated methods to understand and quantify the probability of certain events occurring in a given time period. The insurance industry invests heavily in catastrophe models for various perils and continues to fund research on climate change. We continue to develop novel analytical approaches to narrow the uncertainty around risk quantification. Most of the research, development, and investment that goes into understanding risk through initiatives like the Willis Research Network has in the past been directed toward understanding risk for the built environment. Now, we can leverage this expertise to understand the risk for ecosystems. The insurance industry becomes a natural and perhaps necessary voice in the discussion around ecosystem resilience and protection from extreme events.

Designing an insurance product to protect a coral reef system requires a fluency in the interactions between exposure, hazard, and vulnerability. Exposure might conventionally refer to buildings, people, and critical infrastructure, but in this case, it relates to the location and character (for example, the amount of live coral) of the reef itself. The occurrence and severity of the types of events that could impact the coral reef represent hazard. Finally, vulnerability curves link exposure and hazard by describing the expected impact that a specific location on the reef might sustain from a given hazard intensity. Such an analysis quantifies, for example, the likelihood of a tropical cyclone hitting a specific section of the reef and the loss that the reef would sustain. It is an exercise like this that forms the basis for designing a parametric insurance program.

The Mesoamerican Reef Insurance Program

The Mesoamerican Reef (MAR), sometimes called the “Great Mayan Reef,” is the largest barrier reef in the Western hemisphere. Extending along the coastlines of Mexico, Belize, Guatemala, and Honduras, the MAR is home to hundreds of species of fish, mollusk, turtles, crocodiles, manatees, and of course, coral. The reef structure itself and the organisms that inhabit it directly support millions of people living along the coast. It is difficult to fully capture the economic value of the entire reef, but the ecosystem services that the MAR provides have been estimated at USD 4.7 billion annually. This includes direct benefits to commercial fishing and tourism sectors and the protection the MAR provides to coastal developments from high water levels and waves

The Mesoamerican Reef is classified as critically endangered by the International Union for Conservation of Nature (IUCN). According to the IUCN, it has a fifty percent chance of collapse within the next fifty years. Tropical cyclone impacts contribute to this risk of collapse, and the ability of reefs to withstand future sea level rise, warmer conditions, ocean acidification, and direct human impacts is partly dependent upon its capacity to withstand and recover from these tropical cyclones. The MAR Insurance Program addresses that portion of the risk resulting from hurricane events.

The MAR Insurance Program is a parametric insurance program, distinguishable from a conventional indemnity-based insurance program because it pays out based on a qualifying event occurring and its relative intensity, rather than on physical damage or financial loss incurred. In the event of a severe tropical cyclone event, where intensity, captured through peak wind speed, in the covered reef area exceeds a specified threshold, the parametric insurance product ‘triggers,’ releasing the payout to the MAR Fund. The amount of the payout increases with the intensity of the event, thus proxying the increase in reef damage and greater cost of response for more severe events. The MAR Fund, through its Emergency Fund, then deploys this money to support early reef restoration and recovery activities with pre-agreed partners following written protocols. For example, reef brigades, or skilled teams with an understanding of proven reef restoration approaches, will remove debris and reattach coral fragments. Kickstarting the reef recovery process in this way helps to minimize the impact of damaging storms and enhances the climate resilience of nearly two million beneficiaries. The cost/benefit ratio of such actions has been calculated at close to 1:10 compared to no intervention.

Parametric insurance can provide predictable and timely funds to support emergency response actions.

Designed to help support recovery activities after a tropical cyclone hits the reef, schemes like this currently lend themselves to a parametric, rather than to an indemnity, solution. Indemnity-based insurance would be extraordinarily difficult and potentially inappropriate to apply to critical natural infrastructure, particularly because natural infrastructure is currently characterized by limited risk information and by the absence of loss-adjustment protocols or experience. Parametric insurance tools offer an alternative, providing the opportunity for predictable and timely funds to support emergency response activities based on the intensity of the hazard across the area of interest.

The product deployed here through the MAR Insurance Program focuses on tropical cyclone hazard for several reasons. First, tropical cyclones represent an external hazard. They do not present a moral hazard since actors cannot adversely influence the reef exposure in such a way that they would benefit from a payout. Second, the relationship between hurricane intensity (captured through peak windspeed) and reef damage is documented in literature, regionally and for the Mesoamerican Reef. Accordingly, a product can be designed to capture the increase in cyclone intensity as a proxy for increasing reef damage. Finally, a parametric insurance approach allows funds to be released within a week or two of an event occurring. This is paramount to fulfilling the product’s purpose of supporting rapid clean-up and early initialization of coral reef restoration efforts. These efforts support the resilience of the MAR ecosystem through promoting earlier and more complete recovery. This in turn shortens the time during which the ecosystem services that the reef provides are interrupted and degraded.

Toward a more resilient future

There are so many more programs like the MAR Insurance Program that could, and will, exist. Nature-based solutions, and the harnessing of insurance tools to protect ecosystems, are making their way into the mainstream conscience. The insurance industry will unquestionably be a leader in this evolution of finance.

The tools and techniques of insurance can offer practical solutions to protect critical ecosystems.

In order to strengthen expertise internally, the insurance industry must continue to invest in understanding which ecosystems need to be protected, how they can be protected, and what role finance can play in ensuring ecosystem resilience. To understand which ecosystems are at risk requires an understanding both of the ecosystem itself and of the natural (and anthropogenic) hazards that the system faces. Developing ways to better represent natural capital and associated ecosystem services within catastrophe models is critical, both to ensure that their value is recognized and to encourage more informed ecosystem risk management. An important part of this process is characterizing ecosystems in terms of their position, extent, and the species that comprise them, and linking these characteristics to the services they afford. Such characterization needs to take place at scale (national, or global if possible) and must be flexible enough to capture changes in the ecosystems themselves. Static ecosystem cover maps, for example, would quickly become outdated. Here, partnerships with academia become invaluable, and tools that offer a dynamic and complete view of Earth’s surface, like satellite-based Earth Observation, offer great potential.

Even acknowledging early progress towards enhancing current risk modeling approaches to include future climate changes, natural capital, and associated ecosystem services, improved ecosystem protection is far from guaranteed. Alongside novel risk assessment techniques, the economic value of our ecosystem services must be clearly communicated to politicians and policymakers, to companies and governments that benefit from these natural public goods, and to the public at large. The tools and techniques of the insurance industry can contribute practical solutions that help to protect our critical ecosystems. In doing so, our industry can help create a more resilient planet.


Lead Associate, Willis Research Network
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Senior Associate,
Disaster Risk Finance & Parametrics,
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