Climate Change Risks Spark New Types Of Insurance Policies
Coral reefs, mangroves and even some fish could soon have their own insurance policies as the industry seeks new ways to boost protection for those affected by the ocean changes wrought by climate change.
Warmer sea temperatures have led to more intense storms in the Atlantic Ocean, contributing to $320 billion in disaster losses from weather and climate-related events last year, according to the World Meteorological Organization. Only about a quarter of these were insured.
But despite high payouts, industry experts speaking at the Ocean Risk Summit in reinsurance hub Bermuda said so-called “ocean risk” – which encompasses storms and hurricanes as well as marine diseases and declines in fish stocks – can present opportunities for insurers if the risks are modeled correctly.
One way to increase coverage is to devise new financial instruments to insure “green infrastructure” – such as coral reefs, mangroves and salt marshes that act as natural barriers against storms and can reduce devastating losses on land.
“There is a new role for insurance companies in the context of development strategies for countries most vulnerable to ocean risk,” said Falk Niehörster, director of Climate Risk Innovations, a risk management consultancy.
Niehörster has urged the creation of new insurance products to cover the $1.5 trillion global “blue economy” including fisheries, marine transport and other sectors.
Mark Way, a former reinsurance official who helped Swiss Re implement a policy for dozens of kilometers of coral reef and beach in Mexico this year – a world first – said his charity was inundated with calls from other insurers after the concept was announced.
“There’s a lot of capital looking for investment opportunities so there are incentives to find innovative new ways to provide cover,” Way, head of global coastal risk and resilience for The Nature Conservancy, told the Thomson Reuters Foundation on the sidelines of the summit last week.
Governments also have a keen interest in such insurance policies since they can reduce the human and infrastructure losses on land that devastated parts of the Caribbean last year. Kedrick Pickering, deputy premier of the British Virgin Islands, which was hit by Hurricane Irma last year, said reef insurance was something the country would consider.
The Mexican reef insurance model works by automatically triggering payouts once storm-force winds hit a certain level. The same concept theoretically could be applied to damage to fish stocks causes by El Niño, based on changes to water current. Payouts would go to fishermen in that case.
“There is a whole host of ideas and we are just scraping the surface,” Way said.
However, some risks – such as pollution and overfishing, which scientists say could contribute to the loss of as much as 90 percent of global reefs by 2050 – are not covered under the novel Mexican insurance model.
And many species that have an enormous value to ocean ecosystems, such as crucial oxygen-generating bacteria, do not have easily quantifiable benefits to humanity, so are difficult to insure.
“Insurance can’t solve all the problems and we need to be mindful of the blindspots,” said Rashid Sumaila, director of the fisheries economics research unit at the University of British Columbia Fisheries Centre.
But so far even clearly identified threats to established markets remain largely uninsured. The nearly $23 billion a year northeastern US fisheries market, which includes high-value species such as lobster, scallops and cod, is expected to suffer from rising sea temperatures but so far remains largely uninsured, for instance.
Experts say more data and research on the oceans, such as plans to map the ocean’s resources as well as an ambitious project to create an ocean risk index by the end of this year, may help provide the missing pieces for insurers.
“Insurers are already developing products in response to ocean risk but an index could accelerate and deepen their engagement,” said Robert Powell, a senior consultant with the Economist Intelligence Unit, which is formulating the risk index.
Creating insurance products for marine assets could also build incentives to protect them against threats, or at least the ones local communities can control, Way said.
“If you can make the case successfully that it’s worth investing in an insurance policy then why spend that money if you are going to kill the reef through nutrient run off or pollution?” he asked.
Still, conservationists say there is a limit to what insurance can do and other protection will have to come from regulation, such as reducing illegal fishing and implementing a UN goal to transform 10 percent of the world’s oceans into protected areas by 2020.
Another shortcoming is that insurers, who tend to offer policies on short time horizons, are only likely to be interested in providing coverage against ocean risks in milder global warming scenarios.
Under the Paris Agreement on climate change, countries aim to hold average global temperature risk to “well below” two degrees Celsius, with an aim of one and a half degrees. So far, however, inadequate global plans to cut emissions suggest temperatures could rise three degrees or more.
“At three-degrees [temperature increase] you are looking at a structural challenge for billions of people that creates a whole new level of economic and social challenges for which insurance may not have all the answers,” said Rowan Douglas, head of capital, science and policy practice at global advisory firm Willis Towers Watson.