Article by Maya Dhanjal, Jamie Pollard, and Sarah Conway, WTW Disaster Risk Finance

Our oceans are facing unprecedented challenges as the impacts of climate change compound with economic and developmental pressures. Reducing biodiversity loss, maintaining healthy oceans, and promoting sustainable livelihoods are critical and require holistic risk management solutions that also contribute towards long-term resilience.

One such tool to manage climate- and nature-related risks is parametric insurance. A number of ecosystem-related parametric insurance programmes already exist, providing protection for coastal and marine ecosystems, such as coral reefs and mangroves, and their associated livelihoods, such as fisherfolk (see Figure below). However, parametric insurance to support ecosystems is relatively novel, only just beginning to demonstrate its potential.

Parametric Insurance is a form of pre-arranged, trigger-based financing where pay-out amounts are based on the exceedance of a pre-agreed hazard threshold.

As part of the NATURANCE project – which aims to encourage dialogue, knowledge sharing and mutual learning on the feasibility and performance of risk financing solutions, such as parametric insurance, for nature –  WTW hosted an in-person roundtable event in June 2024 to discuss parametric insurance for marine and coastal ecosystems and livelihoods. Conservation specialists, brokers, insurers, law firms, and blue finance funders participated in the discussion.

By bringing together this group of experts, we were able to discuss when and how parametric insurance can be a valuable tool for the protection of ecosystems and dependent livelihoods; what has been working or not working for existing products, programmes and concepts; and certain foundational design and implementation principles that are needed for success.

The workshop discussion highlighted key lessons from existing products, programmes and concepts, which includes various benefits and challenges to consider when exploring parametric insurance for marine and coastal ecosystems.

Key lessons from existing parametric insurance products, programmes and concepts include:

• Successful insurance products rely on a collaborative ecosystem of various actors. Several actors are required to implement these products, including: policyholder, broker,  (re)insurer(s), and calculation agent. In some cases, a third party pays for the premium and/or the policyholder has arrangements to channel pay-outs to local organizations or other beneficiaries. Different insurance programmes may include more, or fewer, roles and the same actor may fulfil several roles.  In every case, the local partner(s) are critical to define fit-for-purpose pay-out use cases and embed the insurance programme within broader conservation or livelihood protection efforts. This includes inputting to the insurance product design (e.g., by informing pay-out amounts and how pay-outs scale with event severity) and the getting necessary structures in place to distribute pay-outs following an event.
• Parametric insurance for coastal and marine ecosystems is most powerful when embedded within a broader conservation, adaptation or development programme. For example, the MAR Insurance Programme is designed to strengthen the existing conservation programme of the Mesoamerican Reef Fund. This includes established governance and leadership plans, a network of certified reef brigades trained to undertake emergency reef response, and financing arrangements in the form of an Emergency Fund which is used to direct resources to local response groups.
• Expectations surrounding when parametric insurance products pay-out must be clearly communicated. Among the suite of risk financing instruments, insurance is typically best suited to finance response to severe, infrequent events whose impacts demand quick actions that cannot be funded through other sources of finance (e.g., grants, loans). A key reason for this is that insurance is a relatively expensive form of finance and so is best reserved for these extreme events. Typically, insurance products are not designed to pay-out every year and one should not expect to receive a pay-out in the first year of an insurance programme.  However, when programmes are government funded / endorsed, an absence of pay-outs in the first year may make it difficult to justify continued funding of the scheme from a political perspective.
• Longer-term insurance programme financial sustainability requires upfront planning. Most existing programmes are still in the early years and often benefit from third-party premium financing.Dedicated time and funding is required to develop multi-year strategies for paying insurance premiums. Future renewals are likely to require other sources (e.g., domestic government; local public and private sector contributions) and structures (e.g., endowment and/or sinking fund) to ensure their long-term sustainability.
• Policyholders must be legal entities that demonstrate insurable interest. Insurable interest is defined as an entity havinga direct financial relationship with a given risk within a defined geography. There is no such thing as a “global insurance policy” / cross-border insurance for group policies. Policyholders must also have the capacity to utilize pay-outs effectively (e.g., clearing debris post-tropical storm on reef or mangrove ecosystems). In cases where it is not possible to establish insurable interest, alternative (non-insurance) risk transfer instruments may be used, such as financial derivatives. Though this may be more expensive and have a higher cost of capital since financial market investors expect higher returns compared to insurance markets.
• There are multiple valid “views of risk”. For any given peril / geography that is the target of a parametric product, there will be multiple “views of risk” since different actors (those designing the product, the re/insurance markets, modelling vendors) will rely on different datasets and risk modelling methodologies. The weighting of these different views of risk will likely influence insurance product pricing. Furthermore, it is very possible that the accepted view of risk will change over time. This happens particularly following significant loss events which reveal that prior risk assessments may not have adequately captured the possible range of impacts resulting from a given hazard.
• Climate change does not necessarily mean that re/insurance costs will increase in future. While climate change is often described as a risk intensifier, for any given peril / geography / product structure, it is not necessarily the case that climate change will increase risk and associated re/insurance costs. For example, atmospheric warming may result in a reduced number of hurricanes at the same time as an increase in the intensity of hurricanes. In this case, the impact on pricing will depend on whether the product structure is designed to respond to the number of events, the severity of events, or some combination of the two.
• There is flexibility in the use of pay-outs. Having money very quickly after a shock event has high value to support the ecosystem or associated livelihoods bounce back faster to their regular functioning capacity (e.g., reef response is most successful if deployed within the first 30-60 days following an event). Pay-outs can be used, for example, to fund event response activities and to compensate for non-damage losses (e.g., due to business interruption). For example, in November 2022, when Hurricane Lisa triggered a pay-out for the MAR Insurance Programme, brigade members in Belize conducted a reef damage assessment, removed debris, and stabilised and repositioned 178 fragments of staghorn, palmata and elkhorn coral in the first phase of response.[1] In Fiji, for the coral reef insurance programme managed by Vatuvara Foundation, the pay-out use cases include reef restoration and also community assistance activities to address food and water security concerns.[2]
• The analytics behind parametric insurance structures for coral reefs are well developed. Insurance products that make use of a gridded parametric structure have proven especially appropriate for capturing tropical cyclone-related damage to reefs and associated livelihoods. This is due to the simplicity of structure whilst capturing the essential hazard parameter (hurricane peak windspeed) responsible for driving damage to reefs; the availability of historical and real-time data; and it’s acceptance by insurance markets.
• Building up pilot by pilot has high operation costs. For parametric programmes, the design process is very important; can be bespoke; and funding for that design can be difficult to raise.  
• The size of the programme, in terms of annual limit, must be appealing to re/insurance markets. For larger programmes, underwriters stand to gain more since various fixed costs associated with pricing and underwriting a programme represent a comparably smaller proportion of the premium charged. For very small programmes, it may be difficult to attract widespread interest from re/insurance markets.
• The geography of the ecosystem plays a role in programme feasibility and affordability. In peak risk zones, underwriters may already have committed significant capital meaning that less is available to assign to novel programmes. Conversely, in non-peak geographies, it may be possible to obtain more competitive pricing since insurers can allocate the same capital to numerous geographies that are characterised by uncorrelated hazards.

The group agreed that there are many reasons to be optimistic that parametric insurance can play an increasing role in protecting coastal and marine ecosystems and their dependent livelihoods, including:  

• Changes to the frequency and severity of acute hazards such as tropical cyclones, and increasing attention towards the impacts of such events;
• Improved recognition of the critical importance of ecosystems and the services they provide for economic development, food security, and livelihoods;
• Growing treatment of coral reefs as “natural infrastructure” and “natural capital,” opening up potential for new funding and enhanced protection;
• Increasing availability of premium finance and sources. Specifically, bilateral and multilateral aid for product / programme design and pilots continues to increase (e.g., Insuresilience Solutions Fund (ISF); Global Shield Solutions Platform (GSSP; Global Environment Facility (GEF); Green Climate Fund (GCF)); and
• Further applications in more developed countries (e.g., overseas territories; Australia; U.S., and Europe), noting that most of the existing examples are in developing or emerging economies due to certain risks (e.g., tropical cyclones) tending to be higher in regions dominated by developing and emerging economies (e.g., Caribbean and Pacific).

The roundtable event established that there are many lessons from existing product, programmes, and concepts which can help to guide future uptake of parametric insurance as a tool to manage climate-related risks faced by coastal and marine ecosystems and dependent livelihoods. The suitability of parametric insurance depends on a host of factors, including presence of climate hazards; insurance design, structuring, and pricing; pay-out use cases; availability and long-term sustainability of premium finance; and securing a policyholder, amongst others. As the conversation evolves, it is the hope that best practices are continuously shared amongst stakeholders and that more solutions are developed to cover additional geographies and new risks to enhance marine and coastal ecosystem resilience.

Parametric Insurance Products, Programmes and Concepts for Marine and Coastal Ecosystems and Livelihoods

As of June 11, 2024
Specific focus on marine and coastal ecosystems and associated livelihoods (terrestrial, small-scale farmers and agricultural products excluded from scope).

1. Hawaii reef insurance held by The Nature Conservancy (link)

2. Mangrove parametric insurance held by the San Crisanto Foundation (link)

3. Quintana Roo Reef and Beach Insurance held by the State of Quintana Roo (link)

4. Mesoamerican Reef (MAR) Insurance Programme held by the MAR Fund (link)

5. Catastrophe Wrapper for Belize Blue Bond held by Belize Blue Investment Corporation (BBIC) (link)

6. MPA Insurance held by Blue Finance (link)

7. Lau Seascape Coral Reef Insurance held by Vatuvara Foundation (link)

8. Nitrogen Risk Insurance held by sugarcane farmers in Queensland​ (link)​

9. Concept: Insurance as an Incentive for Pacific Northwest fisheries

10. Concept: Bad weather periods

11. Concept: Seaweed farming

12. Concept: MPAs

13. Concept: Livelihood protection and ecosystem restoration

14. Concept: Coral bleaching

15. Concept: Ecosystem supporting infrastructure

[1] https://www.wtwco.com/en-ca/insights/2023/01/wtw-and-mar-fund-reef-insurance-programme-pays-out-to-finance-restoration-after-hurricane-lisa

[2] https://www.wtwco.com/en-vn/news/2024/02/wtw-launches-first-ever-coral-reef-insurance-policy-in-fiji