‘Nature as an Asset': Coral Reef Insurance May Be a Sea Change for Conservation

When a strong hurricane hits, an innovative type of insurance will pay for nearly immediate repairs to the coral reefs near Cancún

A groundbreaking new insurance policy is being taken out on coral reefs near the beaches in the Cancún area — not to protect boats or divers but the reefs themselves. 

Through parametric insurance, a new kind of risk management tool, money collected from a tax paid by local hotels will pay for reef repairs along a 60-km (about 37 miles) stretch of the Mexican coastline right after a major hurricane blows through, preserving a vibrant ecosystem that happens to be an effective bulwark for a valuable tourist spot that's susceptible to beach erosion. The arrangement is believed to be the first of its kind, and its creators think it could serve as a model for preserving all kinds of habitats around the world when they're at their most vulnerable.

"Reefs are literally the first line of defense when a storm hits the coastline," said Mark Way, director of global coastal risk and resilience at the American nonprofit The Nature Conservancy. He said that the program would help make the case that "financial systems and services" can be an important tool in conserving and preserving the planet's natural defenses.

The Mesoamerican Reef stretches hundreds of miles from this part of Mexico, the southeast tip that juts into the Caribbean Sea, down to Honduras, forming the second largest barrier reef in the world. It supports a rich variety of wildlife, but it also absorbs much of the strength of ocean waves that can erode the area's popular beaches.

But when hurricanes hit, they can rip away parts of the reefs, killing or damaging coral and leaving the beaches exposed to the elements.

So The Nature Conservancy, the local tourism industry and the Mexican state of Quintana Roo created the state's Coastal Zone Management Trust, unveiled last month at a major international summit hosted in the area. The trust will collect tax money from hotels to pay both for regular maintenance of the coral reef and the innovative parametric insurance policy.

When a major hurricane hits the area and windspeed reaches a certain threshold (how fast is still being worked out), the insurance policy will kick in, paying for the trust to clean up debris in the critical first few days and nurture and replant broken coral for months and years after that.

The financial arrangement has buy-in from the local tourism industry after members came to realize the risks they were facing and that they could do something about it, said Fernando Secaira, Nature Conservancy coastal risk and resilience strategy lead for the region.

"Almost everyone knows that the reef exists but many didn't know about the reef being degraded," Secaira said.

How much tax revenue the trust will collect and how much the insurance will pay out are still being worked out, he said. The plan is to have the the trust up and running by the upcoming hurricane season.

Insuring the reefs with parametric insurance likely wouldn't have been an option more than a dozen years ago.

It's an increasingly popular tool mainly used, so far, by governments anticipating natural disasters like hurricanes and earthquakes, according to Eduardo Cavallo, who researches the economics of natural disasters at the Inter-American Development Bank in Washington. The bank is funded by dozens of governments and gives out development loans across Latin America and the Caribbean.

Parametric insurance for natural catastrophes was first used by Mexico's government in 2006, according to Cavallo. He said the Coastal Zone Management Trust's use of parametric insurance for coral reefs is a far more specific application than he's seen before.

Under a traditional indemnity insurance plan, assessors arrive after a disaster to evaluate how much damage was done and how much money to pay, Cavallo said. The process can take months and there can be disputes over how much money the policy should pay out. 

With a parametric insurance plan, a pre-set payment is triggered automatically, so it can come within days. It's usually more expensive than traditional insurance and requires extensive modeling from the insurer to get right, but for governments that want to respond to a disaster immediately, it's become a good option to supplement traditional insurance and foreign aid, Cavallo said. 

In Latin America and the Caribbean, "there's more and more countries considering this type of insurance and more and more availability," he said.

There's been little controversy so far, Cavallo said, but he noted that "it's a market that's in its infancy."

The quick payout is also critical for coral reefs after a storm, according to The Nature Conservancy.

Coral is "a living organism and as it's rolling around on the seabed, it's getting damaged," Way said.

When big storms do hit, they can damage massive parts of reefs. Three hurricanes that hit nearby Belize between 2000 and 2002 destroyed 75 percent of its coral reefs, according to a study cited in a United Nations report from 2004.

Of course, coral reefs today are always under threat of bleaching, a potentially deadly phenomenon brought on by warming oceans. They're also being hurt by other human activities, like polluting and overfishing.

The Coastal Zone Management Trust isn't meant to stop coral bleaching directly, and The Nature Conservancy has other initiatives aimed at reef restoration, but Way and Secaira noted that the effects of global warming do make coral more fragile and therefore more vulnerable to the damaging waves churned up in intense hurricanes. Through the trust, they believe they'll make the reefs more resilient.

"When it comes to the actual structure of the reef, the biggest risk is hurricane damage," Way said.

The initiative, announced March 8 at The Economist World Ocean Summit in Cancún-Playa del Carmen, came with some fanfare, according to Michelle Bender, ocean rights manager for the Earth Law Center who was at the conference.

The insurance plan seemed innovative to Bender at first — she hasn't seen anything like it, either — but she started identifying some problems with it. She called it a "Band-Aid" for coral reefs that won't treat the bleaching that's chronically ailing them. She also took issue with the way the approach values nature for its human applications, rather its own inherent value.

"We need to move past our traditional economic models that have the economy as our highest tier [in which] nature serves people and people serve the economy," she said.

The Earth Law Center is set to launch its own initiative on Earth Day, a new legal framework that would establish rights for the ocean. It's part of a growing movement for giving rights to nature, she said, noting that a Colombian court ruled this month that the Amazon rainforest has rights.

But others see the economic incentives-based approach as an effective way of getting governments to take conservation seriously.

Michele Lemay, a coastal management specialist also at the Inter-American Development Bank, said she was "pretty excited" about the trust fund. It's the kind of approach she said gets the attention of top government officials who can change policy on a wide scale.

"This is just one specific example where you can go to a minister of finance and you can show we can link a financial product with the conservation of some coastal ecosystems that have value to the private sector," Lemay said. "For a group of decision makers, that's what gets their attention."

Twenty years ago, she said, those ministers, around the Caribbean at least, wouldn't have given an extra thought to such efforts. But she's seen a shift in the last several years that recognizes reefs and other coastal habitats as "the first line of defense against climate change," making governments and institutions much more interested in green infrastructure.

She joked that this project has "the perfect storm" of backers in a major charity like The Nature Conservancy, a focused local government and willing private sector, so it's not guaranteed to work in other cases. But if it does work in Mexico, it will have "a huge demonstration effect," she added.

The Nature Conservancy is already thinking about how to scale the effort around the world, and there's plenty of opportunities, starting with coral reefs. They protect or provide economic benefits to as many as 200 million people on Earth, according to a 2014 Stanford study that also found that restoring reef structures in the tropics is cheaper than building artificial breakwaters.

Mangrove forests, salt marshes and seagrass beds, among other parts of the ecosystem, could also get their own parametric insurance policies. Pollution is another parameter that might trigger payouts.

"We need to reduce vulnerabilities as much as we can" as risks increase with the onset of climate change, Way said.

His colleague, Seceira, suggested parametric insurance could help countries begin to factor their natural wealth into their national accounting, the same way they do highways and hospitals.

"We can approach nature as an asset that you can insure because it's so valuable," Seceira said. "It's changing the mindset of many people."

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