Business to the Rescue! Insurance for Reef Restoration
The idea of investing in green infrastructure—nature itself—is gaining momentum. Environmentalists have long argued that preserving reefs, wetlands, forests, and other natural ecosystems will provide important services to people, from improving air and water quality to reducing the onshore impact of storms. But now people like me have a powerful new ally on our side—business leaders and deal-makers.
Partnerships between business and environmental organizations are developing new and exciting ways to use green infrastructure as a cost-effective, high-return alternative to traditional gray infrastructure.
But still one big question usually remains: how will we pay for this?
It’s a familiar challenge. We see this in discussions about all types of infrastructure. For example, everybody agrees that we need to repair many of our country’s bridges and roads—but there still is no agreement on who should foot the bill.
Good news—we’re now seeing some promising approaches to this funding challenge. Take Quintana Roo, Mexico—home of popular tourism destinations like Cancun and Tulum. The local government, tourism industry, and insurance industry are teaming up to share the costs—and benefits—of protecting a coral reef through a new insurance product—insurance for nature.
Monetizing a Coral Reef
Everybody knows that insurance can be a smart way to protect assets, hedge against financial loss, and provide easy-access funds to repair damages. So why not develop insurance products to cover the most valuable assets in the world—the natural systems that provide us clean air to breathe, healthy water to drink, fertile soil to grow our food, and protection from floods and storms?
That’s the logic behind the Coastal Zone Management Trust, a partnership involving Mexican state government, the Cancún and Puerto Morelos Hotel Owner’s Association, the insurance industry, and The Nature Conservancy. The trust, announced today at the Economist World Ocean Summit, will use funds collected from the local tourism industry to purchase an insurance policy on a stretch of the Mesoamerican Reef.
Healthy coral reefs are valuable assets for coastal communities. They provide a powerful defense against storms, absorbing more than 90 percent of a wave’s force before it reaches shore. They create biodiversity hotspots, provide income to commercial fishermen and drive coastal tourism. And new research shows that corals could even provide new drug therapies. Coral reefs don’t just reduce risk—they add value across a range of sectors.
Unfortunately, reefs themselves can suffer severe damage from storms. In the Mexican Caribbean, hurricanes are responsible for the loss of more reef structure than any other cause. Combined with disease, bleaching events, and other threats, the region has seen a decline of 80 percent of its live coral cover.
The consequences of coral loss are serious, especially in places like Cancun and Tulum. The region is home to a $10 billion tourism industry that depends on the Mesoamerican reef both for protection against storms and as one of its star attractions. Further degradation of the reef puts that industry—and the lives of residents throughout the region—at risk.
How Does Reef Insurance Work?
Despite all the threats they face, corals are remarkably resilient—given time, healthy reefs can recover even from severe damage. After a big storm, we can speed up this process through measures such as reducing water pollution, reintroducing complementary fish species, and introducing artificial infrastructure for corals to grow on.
Of course, such interventions require funding. And that’s where the Coastal Zone Management Trust comes in. Here’s how it works: funds paid by the tourism industry and local governments in the region will support a range of protection and maintenance activities for the reef and adjacent beaches. They will also finance the purchase of an insurance policy to pay for post-storm restoration activities.
The new insurance product is designed as a parametric policy, triggered to pay out in the event of extreme wind speeds hitting the area of the reef. Research tells us that damage to corals starts when winds reach approximately 110 knots—meaning around a Category 4 hurricane. Funds paid out from the policy would be available immediately to repair the reef and beach after a severe storm.
Looking ahead, parametric policies on green infrastructure are just one of many new insurance products that can build resilience for people, nature, and economies around the world. A range of other options further catalyzes private investment in green infrastructure, from reduced premiums for property owners protected by healthy natural infrastructure to nature-based captives, through which businesses create their own insurance companies to cover the protective services of natural infrastructure.
This insurance-for-nature approach is a promising example of creative financing to address a big environmental challenge. But to find more breakthrough approaches like this we need more creative business leaders in the game. This is where you come in. Investors and business people have the expertise and creative problem-solving skills that can help environmental groups develop innovative financial products.
Together, we can protect and improve the health of natural systems, so they can continue to protect us. So let’s roll all up our sleeves and get to work.
Learn more about the launch of the Coastal Zone Management Trust.
This article originally appeared in Forbes on March 8, 2018.