Coastal Ecosystem Recovery Financing for the Future (CERFF): developing insurance products to enhance response and recovery from tropical cyclones

Coastal ecosystems, such as coral reefs, mangroves and seagrass beds, can provide protection against tropical cyclones. They also provide other benefits such as fisheries and tourism. However, extreme storm surges can damage these ecosystems. This reduces their capacity to protect coastal communities from storms that can cause deaths and damage property, and their ability to play a multi-functional role in human well-being, e.g. providing food through fisheries or controlling erosion. It is important to manage these ecosystems well and assist their recovery when they are damaged, so that coastal communities can recover quickly from extreme events. Financial investment in active restoration of these ecosystems is feasible and can be cost-effective over small areas. When large areas of habitat are damaged, setting aside areas of the ecosystem as reserves may be a more cost-effective approach, but people who depend on the ecosystem for their livelihoods, such as fishermen, need to be compensated financially for loss of short-term earnings.

Insurance of these ecosystems could provide a solution to allow for immediate funds to be made available, whether for restoration or as compensation to fishermen. The availability of such an insurance product would enable rehabilitation of the reef or seagrass bed following an extreme storm surge to recover their protective and livelihood-related functions. There has been relatively little work on the development of insurance products to protect public assets such as ecosystems and their services, and this has left a large protection gap. The CERFF project therefore represents an important and timely innovation in the design and development of disaster risk financing instruments.

Developing an effective ecosystem-based insurance product requires a quantified understanding of the extent to which coastal ecosystems reduce risk and damages from storm surges in different situations, and how this varies with potentially confounding factors. These include: (i) the geographical distribution of key habitats; (ii) their functional capacity; (iii) the damage they can suffer; (iv) an assessment of their condition as a baseline; (v) an understanding of how this baseline may change over time in relation to other stressors such as ocean acidification, pollution or overfishing; and (vi) an understanding of the time period and uncertainties around restoration or regeneration.

The CERFF project brings together applied scientists and academics from natural and social sciences and the humanities, with a leading global broking and solutions company. The CERFF team will develop an insurance product to build disaster mitigation capacity through a market-based mechanism that can facilitate rapid responses in relation to extreme events and also incentivise preparedness behaviour. It builds on extensive marine data that Cefas has recently acquired through the Commonwealth Marine Economies programme. Process-based hydrodynamic modelling at Cefas will be combined with species distribution modelling and economic assessment of ecosystem service values to parameterise models of expected and avoided damages. The outputs of the models, combined with scientific understanding of monitoring capability, will inform the development by Willis Towers Watson of a suitable insurance product and associated parametric index trigger for payment. Financial modelling led by York, informed by an understanding of the socio-economic, cultural and political economic factors potentially affecting demand for the insurance project, will allow us to evaluate the flexibility and transferability of the product and its incentive and investment options. This will include adaptability of the product to different locations, and the potential role of the government and external donors in promoting insurance penetration to align private-public incentives, create behavioural changes, and spread the costs of risk prevention within society.

The insurance industry and other bodies concerned with development of disaster risk financing systems will be a major beneficiary from this research. Ecosystem-based disaster risk reduction is now widely recognised as a means of reducing impacts from disasters, enhancing the environment and improving livelihoods. Yet it remains underused in practice, partly because of a lack of financing options. Insurance has tended to focus on protecting private assets and there is a large protection gap for public assets such as ecosystems. Influential figures in the insurance sector have been calling for the industry to do more to manage society's exposure to climate risk. By developing a product for ecosystem insurance, the CERFF project has the potential to break new ground and open up a significant new market in this area. This type of product diversification is a fundamental aspect of insurance, since it spreads the risk across different geographies and lines of business which are less likely to be impacted by a catastrophic event at the same time. The attractiveness of insurance products to underwriters and subsequently suitable pricing are enhanced by technical robustness. Thus, the rigorous scientific underpinning that we will develop in CERFF, including the evidence behind parametric triggers and payouts, will create confidence and broaden the market for the product. The ability to scale up demonstrably successful insurance products also amortizes development and transactional costs, and will make these instruments more appealing to a wider underwriting audience.

Grenada and other Small Island Developing States in the Caribbean will also benefit from this research. CERFF will develop an insurance product that contributes to the sustainable management of threatened coastal ecosystems in these countries. Incentives such as reduced premiums for climate-wise management could be instrumental in prioritising the conservation rather than degradation of these ecosystems. Coral reefs and seagrass beds in good condition will offer greater protection to coastal communities and infrastructure, thus reducing the economic impacts of storm surges and associated flooding, and protecting livelihoods and economic development. More stable ecosystems will provide more opportunities for income diversification such as into tourism, and the products themselves may generate new business opportunities through public-private partnerships. This aligns well with the emphasis on private sector-led growth in Grenada's 2030 National Plan. The research also has the potential to contribute to specific targets in Grenada's National Biodiversity Strategy and Action Plan 2016-2020, where the stated mission includes "the need for restoration of key natural ecosystems ... goods and services in the wake of the devastation caused by extreme weather events" and "The need for biodiversity conservation to be an integral part of the solution to macroeconomic stability and socioeconomic transformation of the Grenadian economy".

More broadly, the importance of ensuring ecosystems are resilient, continue to support livelihoods and contribute to poverty eradication is a central tenet of the Aichi Biodiversity Targets in the CBD's Strategic Plan for Biodiversity 2011-2020. Also at the global level, we will partner with The Nature Conservancy's Coastal Resilience Program to understand how natural ecosystems can and should be worked into strategies for coastal protection to protect livelihoods, and we will link in with the Global Coral Restoration Project, an initiative between SECORE International, the California Academy of Sciences and The Nature Conservancy, that was launched earlier this year in the Caribbean.

Global society will benefit if these insurance instruments are successful, since the products will reduce the reliance of developing countries on developed countries for post-disaster assistance, and create greater resilience in the affected countries.