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Global Insurance Industry Steps Up to Turn Ocean Risk Into Resilience

At the Ocean Risk Summit in Bermuda, experts gathered to advance a new model for how insurance and reinsurance companies can leverage their products and balance sheets to restore marine ecosystems and slow climate change impacts.

Written by Jessica Leber Published on Read time Approx. 7 minutes
Satellite images show Hurricane Irma (center), Tropical Storm Jose and Tropical Storm Katia on September 8, 2017. Damage from the 2017 Atlantic hurricane season exceeded a record $250 billion.NASA/NOAA GOES Project via Getty Images

SOUTHAMPTON, Bermuda – When Hurricane Irma smashed into the British Virgin Islands last September at speeds faster than a jumbo jet at takeoff, the devastation was total. The storm caused damage valued at three times more than the Caribbean islands’ entire gross domestic product, while the territory’s economy – including its biggest industry, tourism – shut down for months.

With emotion in his voice, the islands’ deputy premier, Kedrick Pickering, called “ocean risk” an urgent priority at a conference held last week in Bermuda.

“You’re not just talking about academics. You’re talking about people’s lives,” he told a room full of insurance and finance industry professionals, government officials, scientists and nonprofit leaders gathered at the first Ocean Risk Summit on an island that is a hub for the global insurance and reinsurance industry.

“Ocean risk” isn’t a widely used term – yet. But the summit’s organizers, particularly the Bermuda-headquartered insurance and reinsurance company XL Catlin, want to make it so.

They aim to pin down what the ocean risk concept means and turn it into an industry and global priority as marine ecosystems enter – in the words of United Nations special envoy for the ocean Peter Thomson – “a quickening cycle of decline.” Ocean health advocates were eager to hear XL Catlin’s message because they hope the insurance sector can exert a more powerful, direct influence in slowing that cycle down.

A satellite image of Road Town, British Virgin Islands – after being struck by Hurricane Irma. (DigitalGlobe via Getty Images)

“We can give voice to this,” said XL Catlin chief executive Mike McGavick. “Risk modeling is the very gateway to prevention and resilience. Why? Because when we understand the risks and causes, we can figure out how to invest in prevention, and we can figure out how to create resilience for the community,” he added.

With warmer oceans fueling last years back-to-back Caribbean hurricanes and sea levels rising, insurers increasingly view climate change risks as distinct from extreme weather catastrophes that have occurred in similar patterns for centuries. Climate shifts are now not only exacerbating these storms, but may also reduce global fish catch, redistribute fisheries, harm aquaculture, increase pathogen risks from algae blooms and hurt tourism businesses that rely on healthy coral reefs, to name a few examples from a report by the International Union for Conservation of Nature commissioned for the conference.

But XL Catlin’s ocean risk concept is also meant to go beyond the effects of climate changes, encompassing other ocean stressors such as illegal or unregulated fishing, biodiversity loss and ecosystem degradation. Yet what also became clear at the conference was the difficulty of defining “ocean risk” – does it mean harm to the ocean or harm from the ocean or both? – as well as distinguishing if it has real value in the context of the more widely used terms climate risk and coastal risk.

Tourists play on Horseshoe Bay, Bermuda, the site of the Ocean Risk Summit. The territory’s home minister told attendees it is “very much vulnerable” to a changing ocean. (John Greim/LightRocket via Getty Images)

“The key question to me is how do we measure this risk and what are these risks we are talking about,” said Robert Muir-Wood, chief research officer of Risk Management Solutions. “We need to measure in order to take action,” he added.

Thats one reason why XL Catlin is working with the Economist Intelligence Unit to develop an index to define, value and begin tracking ocean risk factors. The insurance sector could do better at averting future financial losses in this way, according to Falk Niehorster, director of the consultancy Climate Risk Innovations and author of another report released by XL Catlins Ocean Risk Initiative.

Property and casualty insurance, as well as health, aquaculture, political risk and product liability insurance products, could all see losses increase as the ocean changes, he found. But he noted that ocean risk also presents new business opportunities, and while XL Catlin is not the only company thinking along these lines, it is on the front line.

Ocean conservation advocates are focused on what insurance companies can do to mitigate ocean decline. Getting the insurance industry to proactively think about ocean risks can create incentives to build resilience in coastal communities, grow a sustainable “blue economy” and restore marine ecosystems, many said.

A report produced by the conservation group IUCN detailed the many facets of ocean risks. (IUCN)

“There is no better way to mitigate and transfer risk than through insurance,” said Jose Maria Figueres, cofounder of conference sponsor Ocean Unite and the former president of Costa Rica.

The modern insurance industry has its roots in the age-old maritime trade, originally buffeting against financial losses from storms, wrecks and piracy as ships moved cargo across the ocean. Today, marine insurance premiums generate $30 billion, but the opportunities for the insurance industry to have an influence go far beyond the balance sheet.

“I’ve come to think that insurance is a key player in actually bringing about some of the changes that people who work in climate are trying to bring about,” said MIT atmospheric scientist Kerry Emanuel, a prominent researcher who studies how climate change is fueling stronger hurricanes. He is urging the industry to base their risk evaluations on physical models of ocean and climate systems that simulate future storm events, rather than solely on statistical models rooted to past events.

“If insurance gets involved to the point where premiums are based on not past risk, but future risk, there will be pressure on politicians, and we will also gain an understanding in how to price carbon,” he said.

Similarly, Rowan Douglas, head of capital, science and policy practice at the broker and advisory firm Willis Towers Watson, called insurance a “magical gear box” for making capital more sensitive to risk.

For instance, that could mean making it more expensive for coastal developers to destroy wetlands to build on flood-prone beaches or fish farm owners to open a facility in an area vulnerable to rising sea surface temperatures.

Tony Long is chief executive of the nonprofit Global Fishing Watch, which tracks vessels to detect illegal fishing. He said that by offering financial incentives in policies, insurance companies could also help advance transparency and monitoring of high seas fishing vessels.

Insurance companies can also make it easier for the finance sector to take more risky, innovative or untested investments. “The power of what we can do is to blend insurance and risk thinking with mainstream finance,” Douglas said. Going beyond carbon and putting a value on ocean services and assets will “create an economic logic for their resilience,” he said.

Thousands of poisoned clams beached on the shores of Chile. A harmful algae bloom devastated shellfish production in the area in 2016. (ALVARO VIDAL/AFP/Getty Images)

A frequently cited model for using insurance to restore ecosystems is Mexico’s announcement in March that it would purchase the world’s first insurance policy for a coral reef – a 60km (37-mile) stretch of the Mesoamerican Reef, the world’s second-largest reef system.

The policy, funded with the help of Yucatan peninsula hotels that rely on the reef, would be triggered every time a Category 4 or 5 hurricane hits, making funds immediately available to finance reef restoration. This is possible because the reef itself is a valuable asset for storm protection. Designed in collaboration with the Nature Conservancy and Swiss Re, it is an example of a “parametric” insurance policy where the payout is based on a trigger – like a wind speed or flooding level – rather than an assessment of actual storm damages.

Conservation groups and the insurance industry are increasingly interested in these kinds of policies for managing disaster risk and restoring ecosystems. Similar policies could, in theory, protect and insure against an array of climate and ocean risks, experts said, and encourage better management of natural and capital assets. Willis Towers Watson, for example, recently launched the Global Ecosystem Resilience Facility, an insurance initiative to pool risk and finance restoration of both marine and terrestrial ecosystems.

At the conference, The Nature Conservancy and XL Catlin announced the launch of another research initiative that would value and fund restoration of a different ecosystem: coastal wetlands, including mangroves, salt marshes and seagrass meadows.

Those ecosystems not only soak up carbon from the atmosphere, they also protect coastal areas from flooding. The end goal of this particular project is to develop “blue carbon resilience credits,” which could be bought by insurance companies, hotels or other businesses that want to offset their carbon emissions. The blue carbon credit funds would go to wetland conservation, putting a dollar value on both flood protection and carbon benefits being generated.

Despite optimism at the Ocean Risk Summit, development, finance and industry experts also said that insurance is no panacea – particularly when it comes to long-term climate scenarios and developing countries where far fewer assets are insured today and the capacity for governments to adopt expensive or complex financial products is limited.

Pickering of the British Virgin Islands said his people experienced more basic challenges in the aftermath of Irma – particularly “the tardiness in the response of some of the insurance companies.”

Now that insurance money has been paid out, there has been a boom in reconstruction, he said, but in the meantime people have been suffering. Next time, he asked, “how can insurance companies be better prepared?”

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