Coral reef insurance - protection is necessary and possible

More than one billion people in over 100 countries and territories depend on coral reefs for their livelihoods and food worth over $2.7 trillion annually. They provide protection to over 600 million people against coastal flooding as they can absorb destructive energy of waves heading towards shore, thus offering comparable levels of protection to costly sea walls. Coral reefs support at least 25 percent of all marine species, including organisms that are critical for modern-day medical research by sourcing valuable nitrogen and other essential nutrients. Moreover, coral reefs are a major assets against climate change as they absorb carbon in the same way trees remove CO2 emissions from the atmosphere.

However, unless we act soon, we are in danger of losing up to 90 percent of coral reefs by 2050. This would be catastrophic.

Climate change and increasing sea temperatures, in addition to other man-made factors, are exerting pressure, in many cases destroying reefs and their e fragile ecosystems.

Although it seems like a non-brainer that opportunities to reverse the destruction of coral reefs should not be missed, funding sources to save them are scarce. In fact, Sustainable Development Goal 14, i.e. ‘Life below water’, is among the least-funded SDGs by both Official Development Assistance and philanthropic development funding. There are not many projects worldwide either that are focusing on coral reef protection. In addition, risks are real that without adequate funding to protect reefs, investments made so far to protect and restore them will not sustain increasing shocks, thus risking every dollar that is spent.

UNDP’s Insurance & Risk Finance Facility (IRFF) is working with partners to support the development of this critical nature-based insurance solution in various reef-critical countries, where each country or location has its peculiar risk transfer needs yet all converging at the objective of reef protection. UNDP, together with Ocean Risk and Resilience Action Alliance (ORRAA), has produced the report Insuring nature to reduce risk. Risk transfer solutions for coral reefs that offers a roadmap for investing in risk transfer solutions for coral reefs so that adequate payouts are available to carry out restoration activities when reefs are damaged due to disasters.

What can we do to preserve this precious species? With some globally emerging, investor-led financial interventions in reef protection space, there is an opportunity to help close the gap and have a positive impact on the health of coral reefs and reef-dependent economies. Donors and investors must consider how adequate risk transfer mechanisms and insurance can support nature recovery and rehabilitation of coastal communities and augment the agenda of conservation finance to protect marine ecosystems across the globe.

Quick action after disaster is key to saving reefs and can help to avoid their further degradation due to inaction. Yet government capacities and resources to fund the post-disaster response are limited and often overstretched when a disaster hits as budget are redirected, and priorities are given to other issues. Parametric insurance solutions for coral reefs can effectively bridge the impasse: timely payouts for a post-disaster clean-up and restoration activities, help jump-start reef regeneration and recovery, thus reducing the overall loss to the ecosystem and impact on its social and economic services. This, of course, must be done in a layered fashion where the reef custodians create mechanism to carry out regular reef maintenance, even in the times of no disasters, and buy insurance where needed, and in case of loss events, use the insurance claim proceeds to carry out extraordinary reef restoration activities. Nevertheless, it is likely to see a situation where risks are uninsurable by being too small or too frequent, or simply unviable to be passed on to insurers in terms of cost of premium. In such situations, a holistic solution in the form of a reef disaster risk fund will be useful where alternative risk transfer mechanisms can be used.

The Fund incorporates various features, such as finances for regular reef maintenance and investing in risk reduction, as well as paying for small yet frequent uninsured losses. In addition, for larger and insurable risks faced by reefs, the Fund can purchase insurance and alternative risk transfer instruments, and in case of claims, the Fund will receive the payout, which in turn will be used to pay for the reef restoration activities. Somewhere within the structure of the Fund, it can also incorporate the debt component layer to fund those reef repair expenses that cannot be financed by insurance alone. The implementation of Fund’s conceptual design and the hierarchy of its layers may vary according to the locally applicable legal and structural options, and to provide an array of selected functionalities as demonstrated in the different layers of the Fund.

UNDP is engaging with stakeholders and advocating for inclusivity and legal provisions that allow insurable interest in reefs, and setting regulations around insurance for natural capital. It is also working with demand-side stakeholders helping them understand the protection needs and what insurance can offer, especially for vulnerable communities with significant women participation. This involves the development of parametric insurance solutions for coral reefs and advancing risk protection through innovative distribution channels, augmented by stronger risk awareness. The development and deployment of this disaster reef fund is the ambition.

Coordinated action can encourage reef custodians, conservation financiers, and insurers as risk takers to participate in transforming and de-risking reef investments, aligned with biodiversity strategies and planetary boundaries. This will surely help in achieving the multi-faceted aim to protect the at-risk coastlines, lives, and livelihood of millions of people, the economic potential, and the coral species.

While there is a multitude of things that needs to be done by the governments and stakeholders, three things can be done immediately to make cost-effective insurance and risk transfer possible: First, stronger legislative policies and conducive environment for insurance mechanisms is needed to benefit the restoration of coral reefs. This includes bundling insurance solutions with improved reef management activities, thus mitigating potentially damaging impact factors. Second, the insurance industry should work on scaling up its offering on parametric insurance for reefs against the impacts of extreme weather events and accidental damages considering when data relating to risks is limited. Third, reef managers should work on improving risk awareness and capacity building to assess the costs associated with the reef restoration, valuation of reef benefits, and bring standardization in reporting framework that can be used for insurance-funded restoration programmes.

The time is now to protect and restore coral reefs before they are lost with far-reaching consequences. The gaps in meeting the funding requirements for post-disaster coral reef restoration needs to be covered, for which insurance offers a potential solution. With the right policies and enabling environment, the risks can be passed on to the insurers. Whether the question is to protect the environmental gains from conservation finance agenda or the everyday protection of reefs from marine accidents, insurance is the answer. This is more than an ambition – it is an essential task to protect and nurture corals for the well-being of the planet and humankind.