Insuring Nature to Ensure a Resilient Future
The world’s first coral reef insurance policy is paying to repair hurricane damages
This page was updated on December 8, 2020.
Saving Coral Reefs with an Insurance Policy
The world’s first coral reef insurance policy was triggered by Hurricane Delta. This marked a significant milestone in TNC's work exploring using insurance to protect at-risk coastal ecosystems and the communities and economies that depend on them. A recent New York Times story covered how this innovative financial mechanism could change the way we care for our coral reefs.
What’s happening on a 160-kilometer stretch of coastline on Mexico’s Yucatan peninsula may change how the world values its coral reefs and the role of the financial sector in protecting and restoring natural landscapes.
In 2005, Mexico’s Caribbean coast was struck by two hurricanes, causing US$8 billion in damages and closing hotels and other businesses in Cancún long enough to cause further economic impact. But some hotels and beaches in Puerto Morelos suffered less damage than other areas in the state of Quintana Roo. Further analysis pointed to an important connection—Puerto Morelos was protected by a stretch of the Mesoamerican Reef.
This finding has implications for the estimated 840 million people around the world who live with the risk of coastal flooding. For these coastal communities, natural systems like coral reefs, beaches and wetlands provide the first line of defense against storms. In fact, a healthy coral reef can reduce up to 97 percent of a wave’s energy before it hits the shore, reducing both the effects of storm surge and daily erosion.
But coral reefs can themselves be damaged by severe storms—especially those that have already been weakened by pollution, disease, overfishing and bleaching—which then greatly reduces the protection they offer for coastal communities.
To confront this threat in the Mexican state of Quintana Roo, various stakeholders—the state government, hotel owners, The Nature Conservancy (TNC) and The National Parks Commission (CONANP)—have come together to pilot an innovative conservation strategy to build Post Storm Response Capacity: the Reef Brigades.
Created by CONANP in 2018, the Reef Brigades represent an organized, highly qualified team of community members that are trained and equipped to repair the reef after a storm. The same year, Quintana Roo government established the Coastal Zone Management Trust, which is designed to collect and manage funds for reef maintenance and repair. And in a global first, the trust purchased the first ever coral reef and beach insurance policy in 2019 and renewed in 2020 to ensure these vital ecosystems have funding for repairs after extreme storms hit.
How does the insurance work?
The insurance policy is managed by the Coastal Zone Management Trust. Like the brigades, the trust was established by the state government of Quintana Roo in Mexico, with participation of the tourism industry, TNC and other civil society and partners in the local science community, and the international insurance industry.
The trust fund buys the insurance policy and is designed to accept funds from different sources to support the maintenance of Quintana Roo’s reef and beaches. The 2019 and 2020 policy’s coverage extended across six municipalities and approximately 160 kilometers of coastline, including the towns of Cancún, Playa del Carmen, Cozumel and Puerto Morelos.
The insurance is a one-year parametric policy, a kind of insurance in which the policy is triggered not by financial losses, but when a specified set of conditions are met. This means that when wind speeds exceed 100 knots are recorded in a predefined area—as happened with Hurricane Delta—an insurance payout will be made very quickly to the trust fund, allowing swift damage assessments, debris removal and initial repairs to be carried out. Longer periods of restoration and recovery work may follow to restore the reef’s value as a coastal barrier.
This initiative represents a crucial step in the development of financial mechanisms that protect nature and benefits people. Extensive multi-stakeholder collaboration—including valuable guidance from reinsurer Swiss Re—helped take the idea of insurance for the Mesoamerican Reef from concept to reality.
Reef repair in action
The initiative was put to the test on Oct 7, 2020, when Hurricane Delta struck the region as a category 2 storm. First, the brigades were deployed; they have since been working to stabilize more than 1,200 large and medium size coral colonies. In the first 11 days, the brigades collected more than 8,000 coral fragments broken by the hurricane, and planted them in the reef, reducing the damages and substantially enhancing the repair process.
In addition to these important efforts, the insurance policy was triggered and paid close to $800,000 to the Trust Fund. These funds will substantially expand the post-storm response and fund large-scale repair efforts on the reef. This payout is the first time ever that funding from an insurance policy is available to help the reef recover.
“This is a very significant milestone in our work to explore the use of insurance as a mechanism to protect at-risk coastal ecosystems. The fact that the insurance policy has paid out, and will fund vital reef repair activities, is a win for nature and a win for the coastal community, and it will drive further interest in conservation finance and the need to protect marine ecosystems across the globe,” said Mark Way, Director Global Coastal Risk and Resilience for The Nature Conservancy.
“We have demonstrated that building a Post Storm Response Capacity, encompassing human capacity to repair the reef and a financial mechanism, including reef insurance, is critical to help protect the coral from devastating storms” said Fernando Secaira, Coastal Risk and Resilience Program Lead for The Nature Conservancy in Mexico.
2020 has been a historic hurricane season with 27 named storms, many directly impacting the Yucatan Peninsula. In fact, Hurricane Delta stuck just four days after Tropical Storm Gamma battered the coast.
This post storm response capacity, with its innovative funding system, will help protect the region’s US$10 billion tourism industry, encourage the conservation of a valuable natural asset and create a scalable new market for the insurance industry—a model which could be applied to other regions and ecosystems.
A Growing Opportunity
TNC is now working to replicate the model developed in Quintana Roo for other reefs and investigate whether other ecosystems such as coastal wetlands could benefit from a similar approach. To date, TNC has engaged with various partners including the United Nations Development Program, other international organizations and members of the insurance, reinsurance and international insurance brokers community. Prospective projects are currently being explored in the Caribbean, Asia, Australia and the United States.
An emerging body of research suggests there’s a growing opportunity—and need—for this kind of innovation. A study authored by TNC scientists for the Journal of Marine Policy used a combination of data-driven academic research, as well as crowd-sourced and social media-related data to analyze all coral reef-based economies around the world and map those reefs by tourism revenue, ranging from US$1 million to US$40 million per square kilometer. The study found that coral reef tourism generates US$36 billion globally every year.
And a paper released in late 2020 by TNC finds that coral reefs in Hawaii and Florida could be insured against damage from hurricanes but potentially also in the case of Hawaii against marine heatwaves, (bleaching) and sedimentation from stormwater runoff.
But that value doesn’t take into account the significant coastal protection benefits coral reefs provide to nations around the world. If just the top meter of a coral reef is lost, damages from storm surge could double or even triple. In the U.S. alone, coral reefs provide flood protection to over US$1.8 billion of coastal infrastructure and economic activity. With billions of dollars more of built capital protected by coral reefs from flooding around the world, it’s clear that there is a market ripe for financial products and mechanisms that would protect reefs and ensure greater coastal resilience.
More importantly, it’s clear that lives and livelihoods are at stake. Recent research suggests hurricanes could become more intense in the future, putting coastal communities at even greater risk. We can't afford to do nothing—literally.
TNC received generous support from the Rockefeller Foundation and Bank of America Foundation to develop the insurance concept and from Swiss Re Foundation for the development of a first responder protocol, reef restoration protocol and for training the Reef Brigades.
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