The insurance industry exists for disasters, but that doesn't mean insurance companies are fans of such destruction. That's why insurers insist on certain things, like fire escapes, hydrants and alarms, before they'll insure a building. It's all in an effort to minimize what they have to pay in the event bad things happen. These rules have resulted in safer buildings and safer cities while also making sure insurance companies have lower and fewer payouts.
Given this, it only makes sense that insurance companies would provide coverage for other things — like coral reefs, for instance.
This is the mindset of the Coastal Zone Management Trust, a fund created by the Nature Conservancy and the state government of Quintana Roo, Mexico, to provide insurance for a section of the Mesoamerican Reef, the longest barrier reef in the Western Hemisphere. It also happens to be the first line of defense against the waves of powerful storms that threaten valuable tourism spots.
"The Coastal Zone Management Trust and insurance for beaches and reefs are key elements for the protection of the coastal infrastructure, economy and jobs of the most important tourist destination in Mexico," Carlos Joaquín González, governor of the state of Quintana Roo, said in a Nature Conservancy statement announcing the creation of the fund.
Insurance and the environment
The Nature Conservancy has worked to achieve this goal for a number of years now.
"In many cases, we are finding that the best risk reduction solution is a blend of natural and man-made infrastructure. The conservancy is working with engineering companies to explore the optimal infrastructure mix in places such as the Gulf of Mexico and the Caribbean," Kathy Baughman McLeod wrote in a 2015 Business Insurance op-ed. At the time, McLeod was the director of climate risk and resilience for the Nature Conservancy.
Healthy reefs can reduce up to 97 percent of wave energy generated by storms, according to the Nature Conservancy. A loss of just one meter in reef height can result in a twofold increase in damage to coastal communities. And that means more payouts from insurance companies.
While plenty of factors contribute to losses in reef height, including disease and bleaching events, powerful hurricanes are the most immediate short-term threat, with the potential loss of 20 to 40 percent of live coral coverage following a Category 4 or Category 5 hurricane. Basically, the better maintained a reef is, the better protected the community on shore.
In July 2017, the organization announced that it had secured an insurance policy for a 40-mile stretch of the 700-mile Mesoamerican Reef. The Nature Conservancy, beachfront hotels, tourism industries and governments all pay their premiums to Swiss Re through the Coastal Zone Management Trust. The collective pot for the premiums was estimated to be between $1 million and $7.5 million in 2017, with an estimated $25 million to $70 million in payouts a year. Full coverage of the policy went into effect in January.
The policy on this stretch of reef is parametric insurance. This means that a triggering event — severe storms in this case — will result in Swiss Re issuing payouts. No adjuster comes out to assess damage. Claims will be paid in 10 days or fewer, and "coral reef first responders" will be on the scene to inspect the reefs for damage and to take any broken coral to nurseries for rehabilitation. Once they've been rehabbed and regrown, the broken pieces of coral will be reattached to the reef.
In the event the reef is damaged by a storm that doesn't trigger a payout, funds will still be provided to make repairs. Additional money will provided for ongoing maintenance of the reef between storms.
"We always talk about risk reduction, and if you invest a dollar today here, you see $4 here. The reality is that the biggest bang for your buck is almost always in green infrastructure," Alex Kaplan, head of North America for Swiss Re Global Partnerships, told Fast Company in 2017.
Of course, this insurance has other benefits as well. Healthy reefs are vital to to the area's tourism and to the region's wildlife. The region is Mexico's most important tourism hub, hosting more than 12 million tourists a year and generating $9 billion annually.
"This insurance-for-nature approach is a promising example of creative financing to address imminent challenges facing marine ecosystems, both in Mexico and around the world," Mark Tercek, president and CEO of The Nature Conservancy, said in the organization's statement. "The Mesoamerican Reef plays a critical role in protecting residents, tourists and businesses from storm surge and sea-level rise. This announcement is a win-win-win: for conservation, for the community, and for Mexico's economy."
The policy is considered a pilot program, and one that could be used for other reefs or even other ecosystems, like mangrove forests and wetlands, that provide similar natural protections against storm waters.