Safeguarding Marine Ecosystems and Society The role of insurance in protecting nature & supporting sustainable tourism 2 Safeguarding Marine Ecosystems and Society © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org DISCLAIMER This document is the product of work performed by World Bank staff and consultants. The findings, interpretations, and conclusions expressed in this document do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denomination, and other information shown in any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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The World Bank shall not be liable for any content or error in this translation. ADAPTATION If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the authors of the adaptation and are not endorsed by The World Bank. Safeguarding Marine Ecosystems and Society 3 Acknowledgments This report was prepared under the direction of Samantha Cook (Senior Financial Sector Specialist) by Anna Rios Wilks (Senior Financial Economist), with support from Paul Sinclair Wilson (Catastrophe Risk and Disaster Risk Financing Consultant). The report draws on findings from HR Wallingford, as well as academic papers and broader studies conducted by the international community. This report would not have been possible without this earlier research. Anita Tarce provided overall project support. Editing was provided by Anne Himmelfarb, and design by Xtempo Communications. The report benefited from the reviews, comments, and guidance of Etienne Kechichian (Latin America and Caribbean regional team), Jessie McComb (Global Tourism team), and John Plevin (Global Disaster Risk Financing team). 4 Safeguarding Marine Ecosystems and Society Table of Contents EXECUTIVE SUMMARY 6 REFERENCES 54 INTRODUCTION 10 TABLES 16 Table 1. Insurance solutions 16 CURRENT SITUATION 13 Table 2. Expected annual damage (EAD) for low-rise tourist buildings in 33 Risk to the tourist industry due to 13 the Caribbean as a percentage of the coastal natural hazards total value of asset Use of insurance against disasters 15 Table 3. Expected annual damage 33 Existing products in this space 18 (EAD) for high-rise tourist buildings in the Caribbean as a percentage of the OPPORTUNITIES FOR total value of asset DEVELOPING INSURANCE 24 Table 4. Expected annual damage (EAD) in coastal location 1, assuming 34 FOR MARINE ECOSYSTEMS mangroves attenuate the waves by 20 Protection provided by coastal 24 percent per 100m width of mangroves nature-based solutions Table 5. Expected annual damage 34 Benefits for the insurance industry 38 (EAD) in coastal location 1, assuming Supporting blue-green investment 40 mangroves attenuate the waves by 50 percent per 100m width of mangroves Table 6. Expected annual damage 36 THE CHALLENGES IN (EAD) in coastal location 2, assuming DEVELOPING INSURANCE 41 mangroves attenuate the waves by 20 FOR MARINE ECOSYSTEMS percent per 100m width of mangroves Table 7. Expected annual damage 36 Complexity of integrating marine 42 (EAD) in coastal location 2, assuming ecosystems within disaster risk mangroves attenuate the waves by 50 assessments and loss models percent per 100m width of mangroves Complexity of implementing marine 46 ecosystem insurance products that could support tourism KEY FINDINGS AND AREAS FOR FUTURE RESEARCH 50 Safeguarding Marine Ecosystems and Society 5 FIGURES 11 Figure 1. The economic impact 11 Figure 10. Key factors in the 27 of natural disasters on ecosystems effectiveness of coral reefs in wave and economies reduction Figure 2. Current risk in the 15 Figure 11. Global coastal flood 28 Caribbean from natural hazards impacts, with and without coral Figure 3. Structure of trust fund 19 reefs managing reef insurance in Quintana Figure 12. Effect of a healthy reef on 30 Roo, Mexico wave setup and amplitude Figure 4. Design of the RISCO 20 Figure 13. Cumulative percentage 31 product reduction in wave height versus the Figure 5. Example of the steps in 22 width of mangroves estimating the benefit provided by Figure 14. Method used for 32 a marine ecosystem (coral reef) estimating the expected annual against natural hazards (wave damage (EAD) surges) Figure 15. Percentage increase in 35 Figure 6. How the Quintana Roo Reef 23 the expected annual damage (EAD) parametric insurance scheme works in coastal location 1, dependent on Figure 7. Impact of wave hazards, 24 the width of mangroves removed with and without mangroves Figure 16. Percentage increase in 37 Figure 8. Factors affecting wave 25 the expected annual damage (EAD) attenuation in mangroves in coastal location 2, dependent on Figure 9. Relationship between 26 the width of mangroves removed rate of wave reduction and water Figure 17. Decline in Caribbean coral 44 depth for areas with and without between 1970 and 2001 mangroves STOCK PHOTO 6 Safeguarding Marine Ecosystems and Society Executive Summary PHOTO CREDIT: JULITA, PIXABAY Natural disasters and climate change pose finances by evaluating potential financial serious threats to countries and citizens. impacts and developing an approach to ensure In 2020, the World Economic Forum (WEF) adequate funding to respond to financial Global Risks Report found that “over half the needs” (OECD 2024). world’s total GDP [gross domestic product] is moderately or highly dependent on nature Well-functioning natural ecosystems can and its services” (WEF 2020), and the 2024 contribute to financial resilience by offering report continues to rank nature-related risks protection from hazards and supporting among the most critical challenges faced economies. For example, it is estimated that globally (WEF 2024). According to the WEF more than 200 million people benefit from perception survey, the top-four global risks reduced risk of coastal flooding as a result for the next 10 years are all related to the of coral reefs alone (World Bank 2016). Coral environment (WEF 2024). For Small Island reefs are also estimated to produce US$36 Developing States like those in the Caribbean, billion for the tourism industry (Souter et al. the risks and impacts are especially acute: 2020). hurricanes, cyclones, and other extreme weather events are frequent occurrences But while marine ecosystems protect against that negatively impact the economy, affecting hazards, they can also suffer damage in the tourism, agriculture, and fisheries in particular process. Aside from direct damage during (Rozenberg 2021). Going forward, climate hazard events (e.g., from wind and waves), change is expected to increase the severity marine ecosystems also are also affected of hurricanes in the Caribbean. by climate change and human pressures. Corals have declined globally due to sea- Financial resilience is a critical component temperature changes and ocean acidification, of disaster management. It ensures and the Intergovernmental Panel on Climate that timely funding is available to cover Change has found them to be one of the most disaster response and recovery and allows vulnerable marine ecosystems (Gattuso et al. individuals, businesses, and governments 2014). Mangroves are affected by sea-level to take appropriate action (Swiss Re 2018). rise and human pressures. Such damage The Organisation for Economic Co-operation reduces the ability of these ecosystems to and Development recommends “effectively provide future protection and other services managing the impacts of disasters on public to society. Safeguarding Marine Ecosystems and Society 7 It is possible to restore and conserve ecosystems, the extent to which these systems ecosystems, so they continue to provide ameliorate natural hazard events, and the way vital ecosystem services. Successful that climate change influences both factors restoration activities for marine ecosystems are not well understood. More evidence is also can include introducing marine protected needed on the costs and benefits of ecosystem areas (sustainable fishing), replanting restoration activities; benefits are not limited mangroves and coral reefs, and reducing to damage reduction but include recreation waste and pollution (UNEP, n.d). and tourism value, benefits to fishery stocks, are other ecosystem services of relevance. But these activities—and investment in ecosystems more generally—require Issues with scalability pose another finance. One means of accessing financing is challenge to developing ecosystem- insurance, which makes funds available after linked disaster insurance. Because many hazard events occur. Insurance is especially localized, situation-specific factors influence valuable at such times because other urgent both ecosystems and losses from natural financial pressures (e.g., for meeting human hazards, certain insurance products may have a needs and restoring infrastructure) could pull limited potential client base for each risk model funding away from its originally designated they develop. To account for the complexity purpose of strengthening ecosystems. of ecosystems and interactions with disaster losses, risk models require large volumes of This report aims to highlight opportunities many types of data. This requirement means for developing ecosystem-linked insurance that models developed for specific areas — that is, insurance that integrates the effect cannot be extrapolated or generalized for use of ecosystems in products covering coastal over large geographical areas. In turn, this limits hazards. These products can provide funds for the return on investment for insurers—that is, ecosystem restoration after a disaster occurs. the costs of modeling local risk are high, while the potential market that products can serve Research has highlighted the significant is small. challenges in developing ecosystem- linked disaster insurance. A particular This report points to several opportunities challenge is developing the risk models that and ways for ward for developing incorporate ecosystem effects in disaster risk ecosystem insurance. Despite the challenges quantification. These risk models are required facing efforts to develop such insurance, for modeled-loss insurance and indemnity advances are possible and could benefit both insurance products, and they also serve to the insurance sector and Caribbean tourism identify locations that could most benefit industry. from insurance for restoring and maintaining ecosystems. 1. Use new technology. Currently, there is limited knowledge New technologies could help overcome the about the relationship between marine challenges of modeling an ecosystem’s ecosystems and climate shocks, and this interaction with natural hazards. This knowledge gap undermines accurate interaction is highly site-specific, and thus inclusion of ecosystem effects in risk increases the model’s data requirements and modeling. The linkages between marine limits its use over larger geographical areas. 8 Safeguarding Marine Ecosystems and Society But satellite-imagery, mobile data, and machine neither the physical effects of the marine learning offer powerful tools that could address ecosystems nor the impact of natural hazards this problem. They could fill gaps in knowledge on them can be robustly modeled. At the same — not only about how events affect human- time, it is still necessary to communicate the made assets, but also about how events affect value of disaster insurance to buyers. Risk ecosystems and the extent of their ability to modeling and forecasting of expected losses protect against hazards and offer other services can provide motivation to buyers, as well as to society. highlight to the insurance industry which areas could benefit most from insurance offerings. Governments and relevant institutions could take specific actions to promote Parametric and modeled-loss products may and facilitate improved data collection be suitable when the timeliness of post- within their localities and could also share disaster restoration is critical as is the case the data so they can be fully harnessed. for some ecosystems. More broadly, the more The insurance and technology sectors could quickly an ecosystem can be restored after an collaborate to improve data collection, event, the sooner it can return to providing the dissemination, and use by highlighting existing full range of ecosystem services to society— data gaps and technology solutions that including protection from hazards, food should be prioritized. Several data gaps are provision, and areas for tourism and recreation. identified in this report: the extent to which ecosystems reduce impacts of natural hazards; To account for the disaster risk mitigation the amount of damage to ecosystems caused benefits of ecosystems in the design of by natural hazards and the time it takes them insurance and premiums, existing insurance to recover; granular data on local infrastructure product design offers relevant approaches. characteristics and its capacity to withstand Accounting for risk mitigation is a common natural hazards, with and without marine and successful practice in primary insurance ecosystems; and the extent to which local policies throughout developed insurance livelihoods and businesses suffer financial markets and allow insurers to offer premium losses after events. reductions for risk mitigation and incentives for protecting property and businesses. The 2. Explore possibilities for insurance practical issues raised in this report—about design. maintenancerequire setting up insurance contracts and agreeing on the insured entities Appropriate insurance design offers another and the entities responsible for ecosystem way to overcome modeling complexities. maintenance—require attention in this context. While both modeled-loss insurance1 and indemnity insurance require a robust Governments can also take action to explore quantification of likely losses and risk new insurance designs. Governments can reduction to ensure that they are efficiently and conduct initial assessments to identify fairly priced, parametric insurance does not. regions or localities that depend heavily on Pricing of parametric products is based solely ecosystems (such as areas with high revenues on the expected occurrence of a pre-agreed from coastal and eco-tourism, areas with event and a pre-agreed payout if the event important agriculture or fisheries economies), occurs. Consequently, parametric insurance so that these could be targeted for financial can be an option even in situations where protection against natural disasters. 1- Modelled-loss insurance bases pay-outs on expected loss, which are estimated via risk models. Safeguarding Marine Ecosystems and Society 9 Areas identified as both highly important should learn from relevant existing insurance for the economy and highly dependent on products, and in particular be guided by ecosystems would be most likely to benefit how successfully they were implemented. from financial protection against disasters. Governments and interested organizations could assess financial insurance products 3. Promote collaboration between the in use in their localities to understand what insurance industry and environmental elements worked well, what elements worked stakeholders. less well, and how this knowledge could be The insurance industry could act as a applied to new products. catalyst for ecosystem insurance products by collaborating with environmental This report looks at efforts to develop stakeholders, including development disaster insurance that incorporates institutions . Such collaboration could marine ecosystems as a nature-based promote investment in ecosystem resilience solution. The report focuses on damage from activities as part of programs focused on waves (often associated with hurricanes and ensuring livelihoods, economic development, storm surges) and the role marine ecosystems and sustainable tourism. For example, Munich play in ameliorating losses, with a particular Re and The Nature Conservancy recently focus on the relevance to the Caribbean designed a method to combine community- based insurance along the Mississippi River tourism sector—selected in light of its with ecosystem maintenance activities that importance to the region and its vulnerability improve flood prevention (Munich Re and The to natural and climate hazards. The content Nature Conservancy 2021). Initiatives like this of the report could be applied more widely, one, or like the Quintana Roo Reef Insurance, however—that is, to other economic sectors could be explored for the Caribbean and could and regions that suffer similar threats. Ideally leverage regional entities such as CCRIF SPC this broader applicability will increase the and the Caribbean Biodiversity Fund. value of the report, which could serve as a foundation for further advances in this area. Going forward, the insurance industry could promote ecosystem insurance products by drawing on its experience in The report aims to highlight opportunities developing products for other purposes. for developing ecosystem-linked insurance Although modeling the disaster risk reduction that is, insurance that integrates the effect benefits of marine ecosystems is still a novel of ecosystems in products covering coastal area, there has been more experience of hazards. This discussion in the report is modeling and financing wider disaster risk informed a risk modeling feasibility study reduction investments and incorporating conducted by HR Wallingford (2024a, 2024b, them into insurance product pricing. Lessons 2024c) commissioned specifically for this might be learned from the insurance, risk paper to illustrate how the necessary risk modeling, and engineering worlds to help modeling could be developed. The report guide this agenda. Other experts (e.g., in also aims to evaluate the challenges in technology or data science) could offer complementary solutions to aid in advancing developing ecosystem-linked insurance, in risk modeling. Once improved risk models are particular challenges related to risk modeling. developed, other key players (governments, It concludes with a set of recommendations businesses) could be vital partners in product for overcoming barriers to development of development. These collaborative efforts ecosystem-linked products. 10 Safeguarding Marine Ecosystems and Society Introduction STOCK PHOTO The tourism industry is a vital part of to make landfall, with winds reaching 300 kph. economies in the Caribbean. The total Hurricane Beryl affected countries across contribution of the travel and tourism industry to the Caribbean and damaged 95 percent of gross domestic product (GDP) in the Caribbean houses on the islands of Carriacou and Petite was estimated to be over 10 percent in 2023 - Martinique in Grenada (ReliefWeb 2024). increasing over the previous year (WTTC 2023). Travel and tourism is estimated to account for Hurricanes and other hazard events can around 5 percent of direct employment in the have devasting impacts on Small Island region, and wider links from the industry across Developing States, a category that includes the economy are estimated to contribute many Caribbean nations. Disaster losses in another 10 percent to employment (WTTC these states are seven times larger as a share 2023). Both employment and GDP from the of GDP than disaster losses in other countries industry are expected to continue rising over (UNDRR 2024). In addition, rebuilding and the coming decade. recovery costs after disaster events can be disproportionately high for Caribbean countries At the same time, the Caribbean is highly and other small states due to their relatively vulnerable to natural disasters such as small market sizes and geographic isolation. hurricanes, floods, and severe weather. Since 2017, it has experienced four Category Ecosystems provide essential services 5 hurricanes: Irma and Maria in 2017, Dorian in to society, the economy, and the financial 2019, and Beryl in 2024. Hurricane Dorian was sector. These services include the provision of the strongest Atlantic hurricane ever recorded food, water, clean air, and areas for recreation, Safeguarding Marine Ecosystems and Society 11 all of which have clear links to the ability of the Caribbean, coral reefs can act as a nature- the economy (including tourism sectors) based solution against beach degradation to function. One especially vital ecosystem (by protecting against wave damage and service is coastal protection from hazards such providing sand grains for replenishing), while as storm surge waves, which can be provided simultaneously enhancing biodiversity by by coral reefs and mangroves. offering areas for fish stock reproduction and tourist recreation. Ecosystems also provide protection against the risks posed to the economy (including the Climate and natural hazard events can tourism sector) by natural hazards and climate have severe and cascading impacts on change. In effect, ecosystems provide nature- communities, local economies, employment, based solutions to the challenges of protecting and in severe cases macroeconomic sectors against hazards. As defined by the World Bank such as finance, insurance, and the wider (2022), nature-based solutions are “actions to economy (Figure 1). GDP and economic protect, sustainably manage, or restore natural growth can suffer in the long term as a result ecosystems, that address societal challenges of such events. Though marine ecosystems . . . effectively and adaptively, simultaneously can provide protection against natural and providing human well-being and biodiversity climate hazards, they can themselves suffer benefits.” These societal challenges include damage in the process. When ecosystems are maintaining food and water security and damaged or degraded, they lose their ability to human health, addressing climate change, provide future protection and other ecosystem and reducing disaster risk. For example, in services to society. Figure 1. The economic impact of natural disasters on ecosystems and economies Macroeconomic impacts: Price increases (inflation),economic production decrease (GDP), weakened balance-of-payments, slower long-term growth Basic service disruption: Communications, Initial impact: energy, water Physical & sanitation, damage, transport human losses Natural Fiscal hazard consequences: Expenditure on recovery and Sectoral impacts: reconstruction, Local impacts: Agriculture reduced tax Decreased & fisheries revenue, population welfare losses, business sovereign debt Ecosystem protects and workforce interruption in increase from hazard and productivity manufacturing, tourism & services. reduces impact, but Losses disseminate is damaged in the down supply chains process Source: World Bank. 12 Safeguarding Marine Ecosystems and Society Threats to ecosystems and the services they has developed organizations such as the provide can stem from human pressures Network for Greening the Financial System (e.g., increases in the conversion of natural (NGFS) and the Taskforce on Nature-Related areas to farmland or urban areas) as well as Financial Disclosures (TNFD), which help pressures from climate change and natural guide action in this space.2 hazards, but in either case restoring and conserving ecosystems is possible. Marine This report explores ways to build and ecosystems can be restored in various ways, strengthen insurance products that support such as by introducing marine protected areas ecosystems and that incorporate the services (sustainable fishing), replanting mangroves they provide (e.g., protection from storm and coral reefs, and reducing waste and damage), with a focus on the Caribbean. It pollution (UNEP, n.d). includes a brief assessment of the impact of natural disasters on Caribbean economies (in However, challenges exist in developing particular the tourism industry), synthesizes financial solutions to protect ecosystems information on the extent to which marine from natural hazards and climate change. ecosystems can ameliorate damage caused The lack of relevant data and information and by the natural hazards, and proposes a the very limited modeling in this area limit the theoretical framework for how marine ability of financial markets to assess expected ecosystem effects could be incorporated losses from these risks. Interlinkages between into risk modeling. The report leverages work natural catastrophe events and climate change produced by HR Wallingford and AON for this also make understanding these risks—and report (Aon, 2024; HR Wallingford, 2024a, their possible future evolution—more difficult 2024b, 2024c). (Financial Stability Board 2024). The report finds there are significant At the same time, financial markets have an challenges yet to be overcome in developing interest in helping to tackle the challenges ecosystem insurance products that fully posed by climate and natural hazards. For factor in the benefits of marine ecosystems example, reductions in ecosystem services (i.e., the damage reduction for which they can impact the financial system through credit, are responsible). Nevertheless, opportunities market, and underwriting risk (see Financial exist to advance work in this area, which could Stability Board [2024] for an overview). The benefit not just the Caribbean tourism sector financial sector is increasingly aware of such but the nature conservation community, risks to their balance sheets and in response insurance sector, wider economy and society. PHOTO CREDIT: MARIO, PIXABAY 2- See NGFS (2023) and the TNFD website at https://tnfd.global/.els. Safeguarding Marine Ecosystems and Society 13 Current situation STOCK PHOTO RISK TO THE TOURIST INDUSTRY sectors, specifically agriculture, fisheries, DUE TO COASTAL NATURAL and—the focus here—tourism. Indeed, Small Island Developing States in the Caribbean rank HAZARDS among the world’s most tourism-dependent In the Caribbean, climate-related hazards economies as measured by the proportion are frequent. In 2014 it was estimated that of GDP generated by tourism (World Bank in any given year, Caribbean countries have 2020). The total contribution of the travel and a 14 percent probability of being affected by tourism industry to GDP in the Caribbean was a natural hazard (Laframboise and Acevedo estimated at over 10 percent in 2023 and is 2014). Storms and flooding are some of the forecast to continue rising over this decade most common natural hazards, but these (WTTC 2023). countries also experience landslides, volcanic eruptions, and drought.3 Other threats in the This dependence on tourism means that region—such as sea-level rise, temperature disaster events can have significant economic change, and changes in precipitation—may consequences. Disasters often disrupt the air be exacerbated by climate change. and sea travel on which the Caribbean tourism sector depends, and also cause damage to When such events occur, Caribbean hotel and hospitality assets. A recent survey of countries are highly vulnerable due to their businesses in the Caribbean found that 98.5 small populations and the concentration percent of firms depend on air transport for of economic activity in a small number of access to clients (Erman et al, 2021). 3- For details see EM-DAT: The Emergency Events Database, Université catholique de Louvain, Belgium, https://www.emdat.be/. 14 Safeguarding Marine Ecosystems and Society High-damage hurricanes have been estimated interruption covered 11 events (hurricanes, to reduce tourist arrivals by 11 percent on cyclones, and floods) in 11 Caribbean countries average during the 12 months following the between 2016 and 2019 (Erman et al. 2021). event, compared to a year with little or no On average, 42 percent of businesses were hurricane damage (Scott et al. 2020).4 forced to close due to the events. Nearly a third (62 percent) of the businesses reopened To understand how disaster affects the within a week, but others had longer closure Caribbean tourism industry, it is important periods, which brought the average length of to understand how types of damage are closure to 70 days. As might be expected, the categorized. Direct damage refers to damage study found substantial variation in the impact to assets such as tourism accommodation, across events and individual businesses, but restaurants, and other related businesses. could not draw country- or event-specific The insurance sector can cover this type conclusions with certainty. of damage by paying out to cover repair activities as well as temporary rehabilitation. Research has also shown that shocks to the Business interruption refers to disrupted Caribbean tourism sector have consequences operations and loss of income, in addition to for the workforce, particularly women. The wider costs suffered by associated sectors proportion of the population employed directly (e.g., transport) and basic services (energy, or indirectly in the travel and tourism sector sanitation). The insurance industry can also is estimated to be around 15 percent (WTTC cover some of these business interruption 2023). Women are more likely than men to costs. work in the tourism and hospitality sector and along with other marginalized groups may The Caribbean tourism sector experiences have fewer resources to draw upon if they both these types of damage when a disaster are impacted by tourism downturns after a occurs. Recent research on business disaster event (World Bank 2020). PHOTO CREDIT: PHUONG NGUYEN, PIXABAY 4- The cited study controls for other factors that may impact tourist arrivals (pandemics, economic trends, and characteristics of local institutions). Safeguarding Marine Ecosystems and Society 15 Figure 2. Current risk in the Caribbean from natural hazards $ Isolated, small Travel and tourism Caribbean Insurance countries can industry produces countries are coverage against experience disaster a significant highly vulnerable, natural hazards is losses more than proportion due to small still limited other countries of Caribbean populations and economic the concentration product and is an of economic important source activity in a small of employment number of sectors Source: World Bank. USE OF INSURANCE AGAINST Insurance products use one of three main DISASTERS methods for calculating a payout. Traditional indemnity insurance calculates payouts on In the aftermath of a disaster event, if the basis of the actual damage that occurred; businesses have not put in place mechanisms parametric insurance provides predefined to finance losses ex ante, they will be forced payouts based on pre-agreed parametric to reallocate funds from other planned triggers; and modeled-loss insurance bases investment. This can mean putting other payouts on modeling of the loss expected for development and investment projects on different events. More detail on each type of hold and consequently jeopardizing economic product is in Table 1. growth potential. Countries can manage disaster risk using a multitude of mechanisms, including interventions that reduce the expected damage (mitigation activities) and financial solutions to fund restoration and recovery. Ex ante financial mechanisms commonly used by governments include insurance, contingent credit lines, catastrophe bonds, drawdown options, and contingent budgets. Insurance is particularly common and can also form the basis for other mechanisms that employ similar structures (e.g., catastrophe bonds, contingent credit). Insurance is not used only by governments but is also available to private PHOTO CREDIT: WILLIPIXEL, PIXABAY individuals, firms, and other organizations. 16 Safeguarding Marine Ecosystems and Society Table 1. Insurance solutions Type of Data & information Suitability for flood loss How it works insurance needed management Pro: Insurance payouts most closely match the actual losses that occur; Data on the number and thus, they offer a “less risky” form of type of assets in an area, insurance. as well as the value or the price of replacing Con: It takes time to assess the Considered the assets that were damaged and the lost assets. The “traditional” type of estimate their monetary value, so data are required both Indemnity insurance. Payouts that many months can elapse before before events take insurance are based on the payouts are provided. This delay place (in order to allow actual loss and may be problematic if timely access insurers to accurately damage that occur. to funds is required for response and price products) and after events take place reconstruction. In addition, good (to assess the actual data are required before events take damage incurred). place to allow accurate modeling of expected losses and pricing of products. Rather than Pro: The data required (such as matching the weather data) are not extensive exact damage and can be obtained quickly and incurred, the easily; hence payouts are made payout is based on promptly. Once an event threshold is previously agreed reached, payouts can occur almost and predefined immediately. Data on the conditions that Con: Insurance payouts may not characteristics of the Parametric are expected match the actual losses incurred. hazard that took place, insurance to produce a When the real event and losses do such as local wind certain amount not closely match what was expected speed. of damage—for from predefined weather or hazard example, the conditions, the payout may be less windspeed or (or more) than the value of damage rainfall in an that occurred. In technical terms, area reaching the basis risk is higher than for other a predefined forms of insurance. Thus, the product threshold. could be seen as “more risky.” The method Pro: Models are developed in Data on the approximate of calculating advance, often with regional or number, location, payouts is a global data sets. This means that and characteristics combination of models can be run relatively quickly of assets as well as Modeled- or middle ground to produce an estimation of the their value; data on the loss between indemnity value of damage in an area and weather or geographical insurance and parametric therefore allow timely payouts. conditions expected to (subtype insurance. The influence the impact the Con: The extent to which the of losses expected event has on the assets. estimated value and payout match parametric from events The data are required the value of the actual damage insurance) are modeled before events take will depend on the precision of the to produce an place (in order to allow model and data used. In technical estimate of the insurers to accurately terms, improvements in the model actual damage price products). and data reduce the basis risk. incurred. Source: World Bank. Safeguarding Marine Ecosystems and Society 17 To ensure that ecosystems can be restored disasters through the Caribbean Catastrophe quickly after being damaged in a hazard Risk Insurance Facility Segregated Portfolio event, parametric and modeled-loss Company (CCRIF SPC). CCRIF SPC was the insurance could be attractive options. They first-ever multicountry risk pool and consists can disburse funds quickly following an event, of 19 member countries. Since its inception in thus aiding ecosystems’ timely recovery, 2007, CCRIF SPC has delivered US$268 million restoration, and normal functioning and in total through over 64 payouts (CCRIF, 2024). increasing their ability to provide protection from future threats as well as provide other Beyond the sovereign parametric disaster valuable ecosystem services (e.g., coral reefs insurance offered by CCRIF, insurance or beaches for recreation, mangroves for fish- against disasters in the Caribbean is limited stock reproduction). at the domestic level. Limited private sector insurance coverage means that governments Using modeled-loss insurance or indemnity may need to foot more of the bill for post- insurance for ecosystems has a key disaster recovery. Concerning property drawback: each type requires a large volume insurance, penetration was found to be of data—on characteristics of the natural relatively low, ranging from a maximum of hazards likely to impact an area, the assets 4.2 percent in Antigua to just over 2 percent in in the area likely to be damaged, the extent of Trinidad and Tobago, according to a review of expected damaged, and the likely monetary Axco reports in the region (Cook et al. 2024). value of the damage. If these products also integrate ecosystem effects, the information Domestic markets favor traditional indemnity requirements are amplified and the modeling insurance, potentially due to the heterogeneity becomes more complex. of personal or commercial assets covered (property, motor, etc.), as well as its familiarity Parametric insurance offers a way to for clients. Of 1,400 Caribbean tourism overcome modeling complexities. It is priced businesses surveyed between 2016 and 2019, based solely on the expected occurrence of around two-thirds held indemnity insurance, a pre-agreed event and the pre-agreed sum predominantly to cover direct losses caused by paid out if the event occurs. Consequently, disaster events (Erman et al. 2021). Indemnity parametric insurance can still be used even insurance for business interruption was found in a situation where robust modeling is not to be less common, with many businesses possible. In addition to providing funds for using mitigation activities (running generators, ecosystem restoration, parametric insurance relying on water tanks) to limit disruption. can be used to cover direct damage to human Parametric insurance exists mainly at the assets and business interruption losses. regional level through CCRIF. Although risk models are not absolutely required for the insurance industry to offer Local insurance providers exist, but the parametric insurance, purchasers of insurance number is relatively limited. State insurance are likely to require risk models to verify the companies are also absent in most countries; value of the insurance product. an exception is the State Insurance Company of Antigua (SIC) (Cook, et al. 2024). Parametric insurance is already used by Caribbean countries. Sixteen Caribbean countries hold parametric insurance against 18 Safeguarding Marine Ecosystems and Society A couple of explanations are possible for cyclones, earthquakes, and excess rainfall. the limited insurance market development CCRIF also offers a subproduct for the in the Caribbean: fisheries sector, COAST (Caribbean Ocean and Aquaculture Sustainability Facility). This » The cost of premiums is high, and the range pilot project is being carried out in St. Lucia of products is relatively limited, combining and Grenada and covers two types of events: to make products less attractive. adverse weather (business interruption losses » There is a heavy reliance on international due to rough seas and heavy rainfall) and tropical reinsurance to manage risk. Risk cyclone (damage to fishing assets caused retained locally in the Caribbean property by high winds and storm surge) (World Bank insurance markets is less than 10 percent 2019a). Another new product developed by in Barbados, Jamaica, and Belize, though CCRIF extends insurance to the private sector, in The Bahamas it is a more reasonable specifically electric utility companies (CCRIF 23 percent (Cook, et al. 2024). Reliance on 2020). Both COAST and the electric utilities international reinsurance can increase the product offer lessons about how parametric price of insurance and limit domestic market insurance for natural disasters can be delivered development. to businesses and private individuals. The limited current development of domestic Some insurance in the region is specifically insurance markets means that there is designed for ecosystem restoration and opportunity for new market growth, product maintenance; these products pay out development, and domestic economic after disaster events to channel funding benefits. The section below focuses on to ecosystem restoration activities. Some parametric disaster insurance as a potential examples are discussed below. instrument for both managing financial risk from disasters and maintaining marine Quintana Roo Reef Protection (Mexico) ecosystems and the benefits they provide to Launched in 2018, this was the first insurance society. product designed for ecosystem recovery purposes (rather than for the traditional EXISTING PRODUCTS IN THIS purpose of covering human-made assets SPACE and losses, like buildings). It functions as parametric insurance, and payouts are triggered Insurance products are already benefiting by hurricane winds (100 knots) along 160 km Caribbean countries, offering a mechanism of coastline in Quintana Roo, Mexico. When a for financial management of natural trigger event occurs, funds are quickly disbursed disasters. for coral restoration activities (see Deutz et al. [2018]; Visser et al. [2023]). The product Parametric insurance for natural disasters was developed by The Nature Conservancy delivers payouts after disasters if the event in partnership with government and tourism magnitude meets predefined parameters stakeholders; it combines an index-based (such as wind speed). These payments can insurance policy and a trust fund—the Trust for cover physical damage as well as lost business Coastal Zone Management, Social Development, revenue. As mentioned above, countries in the and Security, which was established in 2018 to region have access to parametric insurance manage beaches and coral reefs and purchase through CCRIF. The insurance covers tropical hurricane insurance. Safeguarding Marine Ecosystems and Society 19 The parametric policy allows for rapid payouts (The Nature Conservancy, 2018). Figure 3 and quick commencement of repair activities provides an overview of how the product following storm impacts, which prevent further channels funding to reef maintenance. The damage and enhance recovery. The first Mesoamerican Reef Fund has extended payout—of US$850,000—was triggered in 2020 coverage provided by Quintana Roo Reef by Hurricane Delta (JNCC, 2023). Response Protection to other areas of the reef by working activities undertaken include a first responder with AXA Climate, InsuResilience Fund, and team which immediately cleans and repairs Willis Towers Watson. The Asian Development the coral, and produces further restoration Bank is exploring the feasibility of similar plan, activities to increase the success of programs offering coral reef coverage in Fiji, future coral reproduction, rescuing and Indonesia, and the Solomon Islands (Asian replant damaged corals, and implementing Development Bank 2023). no-fishing areas to allow population recovery Figure 3. Structure of trust fund managing reef insurance in Quintana Roo, Mexico Government Regular Reef contributions revenue restoration Coastal properties fees Minor and TRUST Emergency moderate FUND fund damages Donors Catastrophic Private Insurance damages investments Source: Adapted from Rogers et al. 2023. Hawaiian Islands reef insurance increased to US$200,000 (The Nature Conservancy, 2024). Setting a minimum as After successful piloting in Honolulu, the well as maximum payout can be useful for 2024 reef insurance policy extends coverage reducing liabilities to the insurance sector to all the main Hawaiian Islands. Payouts are and for lowering administrative costs, but it triggered when tropical storm winds reach also means that smaller events need to be 50 knots or more within the geographical covered by the policyholders. area covered. Each year the maximum payout across all the islands is capped at US$2 million; the maximum per storm payout is US$1 million. The minimum payout has 20 Safeguarding Marine Ecosystems and Society Restoration Insurance Service Company in return receives the expected flood loss (RISCO) reduction benefits provided by the mangroves (Climate Policy Initiative, 2019). Following a RISCO is a social enterprise that seeks similar principle, RISCO may extend to selling to develop new sources of revenue for blue carbon credits to interested parties. The mangrove restoration and conservation carbon credit pilot program is being trialed by collaborating with the insurance sector. along the Caribbean coast of Cispatá Bay in The insurance sector plans to pay RISCO for Colombia (Climate Finance Lab 2019). RISCO’s the mangrove maintenance activities, and structure is shown in Figure 4. Figure 4. Design of the RISCO product Conservation and restoration Blue Service Carbon carbon provider(s) risco- credit payments linked or 3rd buyers party Blue. carbon Blue Blue carbon carbon rights Blue carbon (tCO2e) credits Restoration rights Sources insurance holders Blended of finance finance service company Mangroves payments (RISCO) Coastal Impact/ Insurance Coastal Identify clients asset protection concessional Repayments and sites, owners investors Discounted insurance provide guidance premiums Commercial and services. fin. Coordinate Providers with insurance partners Valuation of Fees mangrove risk reduction Insurance companies Source: Adapted from Climate Policy Initiative 2019. Safeguarding Marine Ecosystems and Society 21 Blue bond parametric insurance extension burden while generating funds for marine conservation. The proceeds of this transaction A more indirect type of insurance for marine are being used to meet Belize’s commitment to conservation is offered by the Belize Blue Bond protect 30 percent of its ocean, and to establish initiative and its recent extension to parametric a regulatory framework for coastal blue carbon cover. Belize has contracted insurance that will projects. This transaction demonstrates how aid marine conservation in the face of disasters. parametric insurance can be used to support In 2021, the Government of Belize converted biodiversity goals while protecting loan US$364 million of its debt (equivalent to 12 repayments to help promote economic stability. percent of GDP) in a commitment to protect of 30 percent of the ocean in Belize. In effect, Further information and evaluation of the the country raised capital to reduce its debt case studies can be found in the literature. and fund marine conservation activities (The Beck et al. (2019) highlight lessons learned Nature Conservancy 2022). Through this and requirements for developing future initiative Belize has also secured a parametric projects. These include the importance of insurance policy against catastrophes, which identifying a buyer from an early stage and covers “Blue Loan” debt repayments in the the collaboration of the insurance industry event of a hurricane. By insuring these debt throughout. Consideration of financial repayments against the risk of economic requirements is critical, highlighting the need to losses caused by disasters, the parametric communicate to buyers the expected benefits insurance provides resilience for the Blue Bond of ecosystem protection - for example via risk initiative and improves the government’s ability modelling. Consideration of practical issues to to continue marine conservation activities, overcome (such as institutional arrangements) rather than reallocating previously planned can also smooth implementation. The TNC conservation funds for other purposes. have developed a guide to developing future ecosystem insurance products, based on The December 2021 transaction, a parametric learning from Quintana Roo (Secaria et al, 2019). insurance policy combined with a sovereign This highlights the need for assessment of the debt transaction (a “blue bond”) was placed on ecosystem’s role in protection from natural the market for US$364 million (Owen, 2022). hazards, the extent to which it is damaged The blue bond was arranged by Credit Suisse, by hazards and methods of cost-effective and the so-called catastrophe wrapper was restoration. Other pointers include the need created by Willis Towers Watson (with risk to estimate the funds needed after a storm for capacity provided by Munich Re) as insurance ecosystem restoration, and estimates of the protection for Belize’s loan repayments after value this would provide to insurance buyers. hurricane events. With such a safeguard as The challenge of overcoming basis risk in part of the country’s 20-year sovereign debt parametric insurance is also mentioned in the structure, the parametric transfer of risk literature (The Green Finance Institute 2024). will strengthen Belize’s resilience to climate This risk can be tackled through improved shocks, in turn helping to prevent credit rating risk modelling which enables better forecast downgrades and reduce the time it takes for of expected payout needs, depending on the the economy to recover following a shock. magnitude of events. Many of these topics are expanded upon in the section of this report The transaction with the Government of Belize focusing on the challenges in developing facilitated the reduction of the country’s debt insurance (section 3). 22 Safeguarding Marine Ecosystems and Society Linking insurance to regional vehicles this extra finance for the additional restoration for ecosystem enhancement work required after disaster events, projects might not achieve the results planned for at Following a logic similar to that used by project inception. the Belize Blue Bond parametric insurance extension, insurance could be offered to The next section explores how existing protect funds dedicated to nature conservation insurance mechanisms could be built upon and enhancement, such as the Caribbean Biodiversity Fund. The fund acts as a regional to develop products that couple disaster umbrella, consolidating finance for projects that insurance with insurance for ecosystem are then implemented in 14 Caribbean countries. maintenance, and that also factor in the effect Its core aim is to ensure that projects focused of ecosystems in reducing expected disaster on protecting nature have access to long-term, losses. By protecting ecosystems that protect reliable finance, rather than depending on annual against natural hazards, the insurance industry funding from government or other entities indirectly reduces expected future losses to its that could cease in the event of unforeseen books. Consequently, in the longer term, risk budget shocks. Insurance covering damage to to human-made assets would be reduced and ecosystems from natural hazard events could allow for insurance premium reductions. Box 1 ensure that projects protecting nature can depicts what a new ecosystem-linked disaster access cash for restoration activities. Without insurance could look like. What might ecosystem-linked disaster insurance look like? A disaster insurance product that considers the benefits of marine ecosystems would need to be developed in two stages. First, modeling would be carried out to estimate the benefits provided by a marine ecosystem (such as a coral reef or mangrove forest) in alleviating the effects of a natural hazards (such as coastal waves, storm surge). See Figure 5 for an example of how this estimation might be conducted. Figure 5. Example of the steps in estimating the benefit provided by a marine ecosystem (coral reef) against natural hazards (wave surges) Source: HR Wallingford, forthcoming; adapted from Beck et al. 2018. Safeguarding Marine Ecosystems and Society 23 Second, financial instruments would be designed to (i) smooth financial losses caused by natural disaster events, and (ii) incentivize marine ecosystem restoration and maintenance. For example, an insurance product could reduce its premiums in exchange for restoration activities being undertaken. The expectation is that insurers would be willing to reduce premiums in exchange for marine conservation activities that by protecting coastal assets and ecosystems would reduce their expected financial losses. The Quintana Roo Reef Protection scheme, which offers coastal protection to Quintana Roo marine communities in Mexico, is an example of such a product. See Figure 6. Figure 6. How the Quintana Roo Reef parametric insurance scheme works Hotels pay Trust fund Catastrophe municipalities 2. Trust fund insurance purchases 3. Event triggers 1. Municipalities parametric parametric pay into trust fund catastrophe insurance payout insurance 6. Hotels and communities indirectly 4. Trust fund 5. Livelihoods benefit from the contracts services and tourism scheme because the for reef restoration, assets are ecosystem services maintenance and restored provided by the reef resilience needs are restored Source: Adapted from HR Wallingford, forthcoming; adapted from the Green Finance Initiative 2024. 24 Safeguarding Marine Ecosystems and Society Opportunities for developing insurance for marine ecosystems STOCK PHOTO PROTECTION PROVIDED BY mangroves can ameliorate wave height and COA STA L N AT U R E - BA S E D energy (as illustrated in Figure 7). A recent SOLUTIONS literature review concludes that for water traveling through mangroves, reductions in Marine ecosystems offer protection against wave height vary from 15 percent to 85 percent natural hazards, such as hurricanes, waves, for each 100 m that the water travels, although and storm surges. The effect of coral reefs and where trees are very young their effect can be mangroves in reducing damage from waves smaller (HR Wallingford, 2024a). There is not and flooding has been estimated. A relatively consistent evidence on whether mangroves extensive body of literature suggests that ameliorate the effects of other natural hazards. Figure 7. Impact of wave hazards, with and without mangroves Impact with Mangroves Impact without Mangroves Offshore Nearshore Onshore Source: World Bank 2019b. Safeguarding Marine Ecosystems and Society 25 The extent to which mangroves offer of water; in low water depths, more of each protection from natural hazards depends tree extends above the water surface, allowing on a wide variety of factors. In general, more roots and leaves to dissipate the wave. the key characteristics of mangroves that In higher water depths, where each tree is contribute to reducing waves include the width more covered, the effectiveness is reduced. of mangroves, the density of the tree spacing, Mangroves seem to have a diminishing the maturity and height of trees and leaves, ability to reduce wave height as the water and the structure of the roots (Figure 8). These depth increases, but at the highest water factors depend in turn on the health of the depths there is large variation in findings. mangroves, as well as their species (Baldock It is hypothesized that this could be due to et al. 2014). Another factor influencing the variation in the leaf height above the wave impact of mangroves on waves is the depth (Mazda et al., 2006). Figure 8. Factors affecting wave attenuation in mangroves Density & spacing of trees Age & Height of Height of trees trees Mangrove Species Wave height ed is t a n c e Travell s D ve Water depth m a n g ro hy (- tidal phase) t h ro u g h Aerial root o p o g ra p Slope, t y structure & metr & bathy height Source: Adapted from HR Wallingford, 2024a; adapted from the Green Finance Initiative 2024. PHOTO CREDIT: ANDREAS S, PIXABAY 26 Safeguarding Marine Ecosystems and Society Figure 9. Relationship between rate of wave reduction and water depth for areas with and without mangroves When the water depth is above 0.6 m, the mangroves' Rate of wave reduction r per metre leaves can reduce waves. There is a large scatter in this area because this effect is dependent on the height of the leaves above the ground. For the species of mangroves considered in this study the average height of leaves above the ground was 0.6 m but it can be higher, which reduces the effect on wave reduction. Water depth (m) Area with mangroves Area with mangroves Source: Adapted from HR Wallingford, 2024a; adapted from the Green Finance Initiative 2024. In many locations mangroves have been found to offer long-term flood protection benefits in the hundreds of thousands of US dollars per hectare (Menéndez et al 2020). In Jamaica alone, mangrove forests have been estimated to provide US$32.65 million in flood reduction benefits each year to Jamaica’s built capital. It is estimated that without these mangroves, the country could suffer a 10 percent rise in the number of people exposed to flooding each year (World Bank 2019b). Other ecosystems also offer protection, for example wetlands may have reduced direct flood damage by US$625 million during Hurricane Sandy (Narayan et al. 2017).. Safeguarding Marine Ecosystems and Society 27 Coral reefs can also diminish the velocity and (roughness) of the coral surface, and the power of waves by producing friction against complexity of the coral system. As each the incoming water force. As with mangroves, of these characteristics increases, so too the extent to which coral reefs offer protection does the coral’s effectiveness in ameliorating from natural hazards depends on a wide waves. Some of these elements, specifically variety of factors (Figure 10). For wave hazard reduction, three key characteristics rugosity and complexity, depend on the health are found to be particularly important: the of coral and seem to be in decline. Further steepness of the foreshore slope, the rugosity decline could occur if climate change persists. Figure 10. Key factors in the effectiveness of coral reefs in wave reduction Incoming waves Beach Hydrodynamic parameters 1 – Forereef - Rugosity - Friction 2 – Reef crest 3 – Reef flat - Flat reef width 4 – Lagoon - Declivity 5 - Wave runup area - Lagoon width Source: Adapted from Elliff and Silva 2017. STOCK PHOTO 28 Safeguarding Marine Ecosystems and Society Globally, reef coastlines have been estimated tens to hundreds of millions of US dollars to reduce damage from storms by over per kilometer (Beck et al. 2018). Figure 11 US$4 billion per year on average (Beck et shows the estimated global flood impacts in al. 2018). Some reef locations have long-term scenarios with and without coral reefs being flood protection benefits that range from present. Figure 11. Global coastal flood impacts, with and without coral reefs With reefs Built capital damaged ($US billions) 1400 700 14 350 Without reefs 1200 600 12 300 With reefs Without reefs 1000 500 10 250 800 400 8 200 600 300 6 150 400 200 4 100 200 100 2 50 0 0 0 0 Area People Capital Capital 10 25 50 100 flooded flooded flooded damaged Storm return period (years) (km²) (x 1000) ($US billions) Source: Adapted from Beck et al. 2018. Globally, reef coastlines have been estimated Both coral reefs and mangroves are to reduce damage from storms by over susceptible to damage by storms. Coral reefs US$4 billion per year on average (Beck et often have the ability to self-repair and grow al. 2018). Some reef locations have long-term back (UNEP, 2024), while the situation for flood protection benefits that range from mangroves is less clear. Storms can damage tens to hundreds of millions of US dollars mangroves by changing the hydrography and per kilometer (Beck et al. 2018). Figure 11 topography of mangrove habitat, causing shows the estimated global flood impacts in shifts in sediment, or by directly damaging scenarios with and without coral reefs being trees (Herrera-Silveira et al. 2022). But present. there is conflicting information in the peer- reviewed literature on the degree of damage The impact of natural hazards and climate inflicted on mangroves by extreme weather change on ecosystems events. Studies do not agree on the amount Natural hazards and climate change threaten of damage done by storms or on the time ecosystems and the services they provide— it takes for recovery, though there is some notably the protection of local infrastructure consensus that mangroves do recover after against natural hazards. Damage to marine storms (Krauss et al. 2009; Alongi 2008). How ecosystems caused by storm surges, quickly they recover depends on the mangrove hurricanes, temperature change, and other species and structure, on competition, and hazards reduces their ability to offer protection on changes in geomorphology (Alongi 2008; from future events. Herrera-Silveira et al. 2022). Safeguarding Marine Ecosystems and Society 29 The ability of ecosystems to self-repair and To estimate the value of ecosystems in recover is diminished by climate change protection, the study modeled the hazard and other human-made threats. Mangroves, and expected damage in scenarios with and corals, and other habitats such as seagrass without the ecosystem in place. The modeling are affected by sea-level rise, ocean occurred in five main stages: the first stage acidification, and temperature changes as modeled the natural hazard (the source); the well as damage caused by natural hazard second stage modeled the way it physically events. Corals, for example, can be bleached reaches the coastal area (the pathway); through higher sea-surface temperatures; the third stage modeled the direct damage ocean acidification causes them to become inflicted (the receptor); and the fourth stage more porous, less resilient to erosion, and modeled the consequent financial impact (the less able to withstand incoming wave forces. consequences). In the fifth stage, the model Sea-level rise is another threat. In cases accounted for events of different magnitudes where sea-level rise occurs gradually, corals and probabilities to produce an estimated are more likely to be able to keep pace and average annual damage result. More detail grow upward toward the light. But the extent on the methodology is below. to which corals can keep pace with sea-level rise depends on their species as well as their Stage 1. Modeling of the natural hazard bathymetry. The Great Barrier Reef has been (the source): Two natural hazards (hurricane studied extensively, and recent modeling surge and inundation risk) were modeled has demonstrated that various threats— for The Bahamas, based on 10,000 years of increased temperature, ocean acidity, synthetic hurricane tracks. These synthetic cyclone intensity, competition, predation, hurricanes were generated using statistical and chemical and sediment pollution—could analysis of historical hurricanes from 1979 to cause coral reef decline in the future. Under 2020 inclusive (Grey, Turnbull, and Simmons, all future climate scenarios tested, it was forthcoming; Grey, Liu, and Simmons, found that both climate and pollution pose forthcoming). a risk to inshore coral reefs that could result in bleaching and mortality (Mentzel et al. Stage 2. Modeling the propagation of 2024). the natural hazard reaching landfall (the pathway): Next, the waves and flood depths Case study: Value of marine ecosystem were modeled to produce estimates of the services in the Caribbean maximum onshore height reached by waves for different return periods. An illustrative exercise carried out by HR Wallingford (2024c) attempted to Within this pathway model, the study modeled include the effect of marine ecosystems the effect of coral reefs and mangroves in within disaster loss modeling. The aim ameliorating waves using the SWASH model was to portray how the impact of marine (Simulating WAves till SHore). As described ecosystems (mangroves and coral reefs) at the start of Section 2, multiple factors affect might ameliorate losses causes by natural the extent to which coral reefs and mangroves hazards. The exercise focused on The ameliorate wave propagation (wave height, Bahamas as a case study because of the seabed slope, topography of coastland; relatively developed data sets and models density, spacing, and height of mangrove trees available for the country. and leaves; the species of coral or mangrove, 30 Safeguarding Marine Ecosystems and Society the structure of root systems, and the extent of wave heights, two cross-sections with relatively the coral or mangrove area through which waves shallow reef foreshores (i.e., 1 in 82 and 1 in 242) must travel). The large volume of data required were included in the modeling. Concerning the for modeling these effects means that it was width of the reef flat, the Caribbean tends to have possible to model only seven representative reef flats of about 10–150 m (Lutzenkirchen et cross-sections of Caribbean coast. al. 2023). The reef flat widths modeled ranged from 10 m to 90 m. The width of lagoons behind For coral reefs, five modeled cross-sections coral reefs in the Caribbean also varies from of coastline were chosen as representative of 100 m to 1.5 to 2.0 km (Jordan et al. 1981), and reef profiles found in the Caribbean. In general, the modeling included four cross-sections the slope of Caribbean reef foreshores is steep, with lagoon widths in this range and one with and for this reason, three of the five reef profiles a lagoon 5 km wide. had steep foreshores (i.e., steeper than 1 in 30). Nevertheless, as previous research (Buckley et An illustration of the effect of a healthy reef al. 2022) had shown that the slope of the reef on expected wave amplitude is shown in foreshore is an important factor in attenuating Figure 12. Figure 12. Effect of a healthy reef on wave setup and amplitude Wave setup Surf zone owing to the reef Beach Reef Lagoon Fore reef slope Maximum wave Wave amplitude Decrease No decrease in runup with reef in wave wave amplitude amplitude Maximum wave runup without Wave amplitude Wave amplitude Wave amplitude reef before reef with reef without reef Still water level Still water level with reef without reef Source: Adapted from HR Wallingford, 2024c. Safeguarding Marine Ecosystems and Society 31 It should be highlighted that in cases where typically reduce wave heights by between 15 coral reefs are unhealthy or in poorer percent and 85 percent for each 100 m that condition, they have less impact on wave the water travels (HR Wallingford, 2024a). amelioration. This is due in part both to the Two scenarios were modeled; in the first, decline in the roughness of coral surface mangroves reduce wave heights by 20 percent areas and to the decreased geometrical per 100 m width of mangroves; and in the complexity of unhealthy coral structures. second, mangroves reduce wave heights by In some situations, an unhealthy reef may 50 percent per 100 m width of mangroves. The actually increase the wave propagation (Carlot modeling estimated the benefits of mangroves et al. 2023). in reducing expected annual damage (EAD) depending on their width. Widths of 25m to For mangroves, two coastal areas in The Bahamas were found to be typical of the 500 m were modeled for each of the two Caribbean coast— representative of the wave reduction scenarios (20 percent and flat, shallow, intertidal areas likely to be 50 percent wave height reduction per 100 m of found—and were chosen for the modeling mangrove). The modeled effect of mangroves study. A review of the literature finds that for in ameliorating wave height in is depicted in water traveling through mangroves, the trees Figure 13. Figure 13. Cumulative percentage reduction in wave height versus the width of mangroves 100% 90% Cumulative percentage reduction in 80% 70% wave height (%) 60% 50% 40% 30% 20% 10% 0% 0 100 200 300 400 500 Width of mangroves (m) 20% reduction per 100 metre 50% reduction per 100 metres Source: Adapted from HR Wallingford, 2024b. 32 Safeguarding Marine Ecosystems and Society Stage 3. Modeling the direct physical frequencies and magnitudes: Models were damage (receptor): Modeling was based on run under different scenarios to estimate depth-damage curves for assessing wave or the expected damage depending on the flood damage. In this case, the depth-damage magnitude of the natural hazard event (the curves estimated the physical damage to source). This enabled development of a more low- and high-rise buildings depending on realistic picture. Different magnitudes of the magnitude of the wave event. natural hazard events will occur with different likelihoods; for example, larger hurricanes Stage 4. Quantifying the financial cost of tend to occur less frequently (perhaps once in direct damage (the consequences): The every 100 years), whereas smaller hurricanes direct damage estimated in the receptor occur more frequently (perhaps once in every model was converted to monetary values 10 years). Running the model under different (US dollars). Usually, quantification is based scenarios allowed a yearly average to be on local data on the characteristics and the estimated that considers the likelihood of financial value of assets, coupled with the different events occurring in any one year. estimates of direct damage from stage 36. The modeling stages described above are Stage 5. Accounting for events of different illustrated in Figure 14. Figure 14. Method used for estimating the expected annual damage (EAD) Stage 1: Modeling of Stage 2: Modeling the Stage 3: Modeling the the natural hazards (the propagation of the direct physical damage source) natural hazard reaching (receptor) landfall (the pathway) Stage 6. Estimating Stage 5: Accounting Stage 4: Quantifying expected annual for events of different the financial cost of damage frequencies and direct damage (the magnitudes consequences) Source: World Bank. 6- To provide a simplified example, if the total value of local assets is US$1million, and the damage-curves suggest damage of 7% of the asset value, the total value of damage would be US$70,000. Safeguarding Marine Ecosystems and Society 33 Based on the physical damage to assets damage relative to the total asset value. As estimated by the modeling, the EAD was an example, in table 2, comparison of the estimated as the proportion of total tourist first result in the second and third columns asset value likely to be lost due to damage shows that without any reef the expected in any one year. For example, if the value of annual damage as a percentage of total expected annual damage caused by natural asset value is 10.03% (i.e. 10.03% of low- hazards was half the total value of tourist rise tourist-related building value would be assets, the EAD would be 50 percent. destroyed), whereas the percentage of total asset value lost destroyed reduces to 4.97% For coral reefs, the results of modeling run when a healthy reef is present. This means for the five different coastal areas studied that EAD for low-rise tourist-related buildings are shown in Table 2 and Table 3. would be just over twice the size if the healthy The tables show the value of estimated annual reef is removed and no reef is present. Table 2. Expected annual damage (EAD) for low-rise tourist buildings in the Caribbean as a percentage of the total value of asset Cross- No reef EAD (as % Healthy reef EAD (as % Unhealthy reef EAD (as % section of total asset value) of total asset value) of total asset value) XS-E1 10.03% 4.97% 10.30% XS-E4 11.19% 10.13% 10.95% XS-E6 6.50% 7.02% 10.33% XS-GA1 14.42% 13.69% 14.52% XS-GA3 9.52% 5.33% 12.74% Source: World Bank, adapted from HR Wallingford, 2024c. Table 3. Expected annual damage (EAD) for high-rise tourist buildings in the Caribbean as a percentage of the total value of asset Cross- No reef EAD (as % Healthy reef EAD (as % Unhealthy reef EAD (as % section of total asset value) of total asset value) of total asset value) XS-E1 3.98% 2.08% 4.11% XS-E4 5.11% 4.59% 5.13% XS-E6 2.56% 2.74% 4.16% XS-GA1 8.00% 7.01% 8.18% XS-GA3 3.81% 2.20% 5.86% Source: World Bank, adapted from HR Wallingford, 2024c. 34 Safeguarding Marine Ecosystems and Society For mangroves, the results of the modeling percent (increasing EAD from 8.01% to 8.22%). run for the two coastal areas studied are Where the width of mangroves in front of the shown in Table 4, Table 5, Table 6, and human-built assets is 200 m, then removal of Table 7 and in Figure 15 and Figure 16. For the mangroves could increase the EAD for example, in coastal location 1, assuming that low-rise tourist-related buildings by around the mangroves attenuate wave heights by only 5 percent (from 7.82% to 8.22%). Where the 20 percent per 100 m width of mangroves, width of the mangrove forest is increased to then where the width of mangroves in front 500 m in front of the human-built assets, the of the human-built assets is 100 m, removal removal of the mangroves could increase the of the mangroves could increase the EAD for EAD for low-rise tourist-related buildings by low-rise tourist-related buildings by around 2.5 almost 30 percent. Table 4. Expected annual damage (EAD) in coastal location 1, assuming mangroves attenuate the waves by 20 percent per 100 m width of mangroves EAD for low-rise buildings (% total EAD for high-rise buildings (% Width of asset value) total asset value) mangroves Without With Without With mangroves mangroves mangroves mangroves 25 8.22% 8.17% 4.18% 4.16% 50 8.22% 8.12% 4.18% 4.14% 100 8.22% 8.01% 4.18% 4.09% 200 8.22% 7.82% 4.18% 4.01% 300 8.22% 7.65% 4.18% 3.95% 400 8.22% 7.49% 4.18% 3.88% 500 8.22% 7.34% 4.18% 3.82% Source: World Bank, adapted from HR Wallingford, 2024c. Table 5. Expected annual damage (EAD) in coastal location 1, assuming mangroves attenuate the waves by 50 percent per 100 m width of mangroves EAD for low-rise buildings (% total EAD for high-rise buildings (% Width of asset value) total asset value) mangroves Without With Without With mangroves mangroves mangroves mangroves 25 8.22% 8.04% 4.18% 4.11% 50 8.22% 7.88% 4.18% 4.05% 100 8.22% 7.60% 4.18% 3.93% Safeguarding Marine Ecosystems and Society 35 EAD for low-rise buildings (% total EAD for high-rise buildings (% Width of asset value) total asset value) mangroves Without With Without With mangroves mangroves mangroves mangroves 200 8.22% 7.14% 4.18% 3.75% 300 8.22% 6.80% 4.18% 3.62% 400 8.22% 6.56% 4.18% 3.53% 500 8.22% 6.38% 4.18% 3.46% Source: World Bank, adapted from HR Wallingford, 2024c. Figure 15. Percentage increase in the expected annual damage (EAD) in coastal location 1, dependent on the width of mangroves removed 30% Percentage increase in the Expected Annual Damage if no mangroves are present 25% 20% 15% 10% 5% 0% 0 50 100 150 200 250 300 350 400 450 500 Width of mangroves (m) Low-rise buildings with 20% wave attenuation High-rise buildings with 20% wave attenuation Low-rise buildings with 50% wave attenuation High-rise buildings with 50% wave attenuation Source: Adapted from HR Wallingford, 2024c. 36 Safeguarding Marine Ecosystems and Society Table 6. Expected annual damage (EAD) in coastal location 2, assuming mangroves attenuate the waves by 20 percent per 100 m width of mangroves EAD for low-rise buildings (% total EAD for high-rise buildings (% Width of asset value) total asset value) mangroves Without With Without With mangroves mangroves mangroves mangroves 25 15.59% 15.33% 7.38% 7.29% 50 15.59% 15.08% 7.38% 7.20% 100 15.59% 14.58% 7.38% 7.03% 200 15.59% 13.63% 7.38% 6.70% 300 15.59% 12.75% 7.38% 6.41% 400 15.59% 11.94% 7.38% 6.15% 500 15.59% 11.19% 7.38% 5.91% Source: World Bank, adapted from HR Wallingford, 2024c. Table 7. Expected annual damage (EAD) in coastal location 2, assuming mangroves attenuate the waves by 50 percent per 100 m width of mangroves EAD for low-rise buildings (% total EAD for high-rise buildings (% Width of asset value) total asset value) mangroves Without With Without With mangroves mangroves mangroves mangroves 25 15.59% 14.78% 7.38% 7.01% 50 15.59% 14.88% 7.38% 6.84% 100 15.59% 12.70% 7.38% 6.38% 200 15.59% 11.69% 7.38% 5.97% 300 15.59% 11.40% 7.38% 5.79% 400 15.59% 11.18% 7.38% 5.66% 500 15.59% 11.02% 7.38% 5.57% Source: World Bank, adapted from HR Wallingford, 2024c. Safeguarding Marine Ecosystems and Society 37 Figure 16. Percentage increase in the expected annual damage (EAD) in coastal location 2, dependent on the width of mangroves removed 45% 40% Cumulative percentage reduction in 35% 30% wave height (%) 25% 20% 15% 10% 5% 0% 0 50 100 150 200 250 300 350 400 450 500 Low-rise buildings with 20% Low-rise buildings with 50% wave wave attenuation attenuation High-rise buildings with 20% High-rise buildings with 50% wave attenuation wave attenuation Source: Adapted from HR Wallingford, 2024c. Modeling case study conclusions and expected to provide less protection than a caveats healthy reef. These results highlight how crucial ecosystem health is for the well-being The study found that corals and mangroves of the tourism industry and the wider society can provide significant value in reducing the and economy. damage caused by sea wave hazards. Results suggest that mangroves could reduce The modeling suggests that for certain damage to tourist assets, depending on locations, healthy corals could halve the the width of mangroves and site location. expected annual damage to certain tourism For coastal location 1, assuming that the assets, though in other areas their impact is mangroves attenuate wave heights by only 20 more limited. In one coastal location studied, percent per 100 m of mangroves, the modeling unhealthy coral reefs actually have a slight shows that where the width of mangroves negative impact and increase the EAD by 7 in front of the human-built assets is 200 m, percent relative to a situation without reef removing the mangroves could increase the presence; this result reflects the finding by EAD for low- and high-rise tourist-related Carlot et al. (2023) that unhealthy coral reefs buildings by around 5 percent. If the mangrove may increase the EAD to infrastructure in forest width was increased to 500 m, removing certain situations. In reality, unhealthy corals the mangroves could increase the EAD for are expected to increase expected damage low-rise tourist-related buildings by almost 30 relative to the absence of any reef only in very percent. In coastal location 2, assuming that specific situations. But an unhealthy reef is the mangroves attenuate the wave heights by 38 Safeguarding Marine Ecosystems and Society only 20 percent per 100 m of mangroves, where ecosystems. Reductions in ecosystem services the width of mangroves in front of the human- can impact the financial system through credit, built assets is 200 m, removing the mangroves market, and underwriting risk (see Financial could increase the EAD for high- and low-rise Stability Board [2024] for an overview). The tourist-related buildings by between 10 percent financial sector is increasingly aware of risks to and 15 percent. As the width of mangroves their balance sheets posed by natural hazards increases, the damage reduction rises, reaching and in response has created organizations almost 40 percent for low-rise tourist-related such as the Network for Greening the Financial buildings. System and the Taskforce on Nature-Related Financial Disclosures, which help guide action As this is new work, the following caveats in this space.7 apply and should be kept in mind for future studies: By reducing risk and expected losses, insurers save money, and they can pass on » Research requires highly localized data these savings to their clients in the form less and site-specific modeling. It is possible expensive premiums. Accounting for risk to estimate the potential value of marine mitigation is common practice in primary ecosystem protection in terms of damage insurance policies throughout developed reduction from natural hazards where insurance markets (including in insurance highly localized data are available and regulation), with both premium reductions site-specific modeling can be carried out. and incentives for taking measures to That is, for modeling to accurately reflect protect property and businesses. Exploring expected damage, it is necessary to have the success of promoting such resilience highly specific ecological, topographical, investments (successful at primary insurance bathymetrical, and geographic data. As with levels, but notably less so at larger scale) and all models, the results depend heavily on how that could be used to support eco-system the assumptions used, and consequently resilience would be beneficial. Insurance can validation of the model and its results is key. thus play a part in climate change mitigation » The models’ limited scalability creates high and adaptation by incentivizing risk reduction barriers to market entry for the insurance through these ecosystem maintenance industry. The need for highly localized data activities. on a large number of variables means that risk models cannot be extrapolated to serve Moreover, the insurance industry has larger geographical areas. This constraint opportunities to expand its markets by limits the potential market size that any insuring marine ecosystems themselves. one model could be used for, and makes a Coral reefs alone are estimated to produce significant return on investment in modelling US$36 billion for the global tourism industry less likely. (Souter et al. 2020), yet the Intergovernmental Panel on Climate Change considers them one BENEFITS FOR THE INSURANCE of the most vulnerable marine ecosystems INDUSTRY (Gattuso et. al 2014). Businesses as well as governments have a motivation to protect The insurance sector can protect the assets this key income source and may be willing to they underwrite by developing insurance purchase insurance to maintain it. products that help maintain marine 7- See NGFS (2023) and the TNFD website at https://tnfd.global/. Safeguarding Marine Ecosystems and Society 39 Insurers also have opportunities to develop ecosystem changes. By combining different new products by harnessing the power of new data (geographic, ecological, and economic), technology. New technology could help fill there might be the potential to build “dirty knowledge gaps—not only about how events but cheap” models of risk. These could affect human-made assets, but also about then be used to highlight areas standing events affect ecosystems and their ability to benefit most from ecosystem insurance to protect against hazards and offer other so that resources could be channeled to services to society. This new information improve modeling in these locations. can help inform risk models developed for parametric insurance. For example: » Satellite monitoring data across time and seasons could be compiled to build up more granular maps of climate and hazard impacts in specific areas. Satellite imagery is being used to monitor ecosystems’ extent (area covered) and in some cases condition. Models can be produced to identify the ecosystem types (habitat) based on satellite and airborne images (Iglseder et al. 2023). In the UK, experts are also investigating methods to assess woodland condition by verifying Sentinel-2 satellite data with on-the-ground monitoring. This work aims to improve the assessment of ecosystem (habitat) condition by refining the satellite- derived indices used—that is, by ground- truthing satellite-based assessments with ecologists’ observations on the ground (Biological Recording Company 2024). » Various technologies could be used to collect data for assessing ecosystem services provided in different locations (Schirpke et al. 2023). Mobile data are being used in citizen science projects (for example, to identify ecosystems with high numbers of visitors); virtual reality technologies are being used to assess the intangible benefits derived from natural assets (e.g., cultural value of a woodland). Evidence of this type could be harnessed to help estimate the value of Caribbean marine ecosystems. » Machine learning could be used to draw together the massive volumes of data STOCK PHOTO required for risk models that account for 40 Safeguarding Marine Ecosystems and Society SUPPORTING BLUE-GREEN benefits the investors (who buy “green INVESTMENT credits” or similar), the nature conservation community, and the local areas that benefit Insurance can protect conservation funds by from the marine ecosystem services. ensuring they are not diverted after a disaster. Often, when public finances cannot cover Insuring green-blue investments, such the cost of post-disaster recovery activities, as carbon offsetting projects, is a recent governments divert funds from other areas innovation by the insurance industry. to fill urgent spending requirements. This Insurance for carbon credits has recently been tendency can put other planned spending— pioneered by Howden Insurance Group. The such as economic development projects, product insures green investors’ purchase social programs, or nature conservation—on of carbon credits with the Mere Plantations hold or jeopardize it completely. Where assets teak reforestation project in Ghana (Howden are insured, however, less public finance is 2024). Carbon offsetting investments do required, and conservation funds are safer. not always produce benefits, whether due to poor design or simply the failure of well- Quantifying the value offered by marine designed activities to achieve the expected ecosystems makes it possible to attract results. Standards have been established green finance to support them; both before in an attempt to improve the value provided and after disasters occurring. Coastal by carbon offsetting projects; these include ecosystems have been estimated to produce additionality (sequestration above what US$15 billion in tourism, recreation, fisheries, would have occurred without investment), and carbon sequestration each year. This permanence (sustainability in the face of includes services from mangroves and climate, natural hazards, and other forces), seagrass (valued at US$6.7 billion a year) and quantification (sufficient data collection to and coral reefs (US$6.2 billion a year). assessment how much carbon is sequestered Carbon sequestration by mangroves alone is in scenarios with and without the project). estimated at over US$6.5 billion per year (Heck Data produced from monitoring these green et al. 2019). Information like this encourages investments can be harnessed to inform investment in healthy ecosystems, which ecosystem insurance. STOCK PHOTO Safeguarding Marine Ecosystems and Society 41 The challenges in developing insurance for marine ecosystems STOCK PHOTO This section explores issues found risk assessments and loss models. To important for developing insurance understand why this is so, some background products and finance for ecosystems. on catastrophe loss modeling is helpful and Experience with existing relevant products provided below. points to challenges in assessing and securing financial requirements (e.g., through risk For insurers to accurately price products modeling), in assessing the costs and benefits covering disaster losses, they must be able to of ecosystem restoration, and in implementing estimate the likely magnitude and frequency practical and institutional requirements (Beck of payouts. On the other side, potential buyers et al. 2019; Secaria et al. 2019; The Green (such as governments and businesses) want Finance Institute, 2024). to know the expected size and magnitude of payouts when assessing the potential benefit COMPLEXITY OF INTEGRATING of purchasing coverage. To forecast the likely MARINE ECOSYSTEMS WITHIN losses that insurance would cover, risk models DISASTER RISK ASSESSMENTS are required to estimate the likelihood and AND LOSS MODELS magnitude of different disaster events, along with their likely impact in terms of damage A major challenge for efforts to develop and losses. Nevertheless, there are multiple insurance for marine ecosystems is challenges in developing risk models able to integrating these ecosystems within incorporate the effect of ecosystems. 3- For details see EM-DAT: The Emergency Events Database, Université catholique de Louvain, Belgium, https://www.emdat.be/. 42 Safeguarding Marine Ecosystems and Society Disaster risk assessments, particularly hazard experienced at a location to a damage within insurance, rely heavily (but not solely) estimate for different types of property, assets, on catastrophe loss models to quantify or infrastructure. These hazard-damage risk and to price insurance based on the vulnerability relationships are often called impact of extreme events. Catastrophe loss damage curves. Catastrophe loss models models were first developed in the late also include a financial model that translates the late 1980s following a series of major damage to property, assets, or infrastructure natural catastrophe events and insolvencies to a financial consequence. among undercapitalized insurers. They are sophisticated tools that draw on scientific However, catastrophe loss models do have disciplines to estimate the financial impacts limitations: of rare/extreme events. Within the property insurance markets, catastrophe loss models » They are extremely costly to develop and are a primary mechanism for estimating risk. maintain. Few companies have the internal capacity to develop models, and the market The basic approach of all catastrophe models is dominated by a few third-party vendors or is to develop a large catalogue of synthetic solutions developed by large international hazard footprints with physically realistic brokers. spatial resolution that cover the geographical » Their development has been focused on extent of the model. Each event in the core property and casualty insurance catalog will have an associated probability of markets, so that the coverage, options, occurrence so that the user can generate tens and quality of models in markets like the or hundreds of thousands of years of physically Caribbean can be limited. realistic simulations of the peril in question. » Their development has prioritized the key Thus, risk can be assessed based not only on drivers of building or property insurance— the limited historical records available, but on i.e., wind over water for insurance in the a very extensive simulation of catastrophe United States. events that are physically realistic and plausible » Their validation is very challenging. All and that expand beyond observed history to risk modeling should provide transparency include much more extreme events than those on the assumptions used and should that may actually have occurred. compare the overall output of the model to historical experience; but when integrating The spatially resolved nature of the events ecosystems into catastrophe risk modeling, allows these models to explicitly capture the ecosystem-linked resilience must be correlations between any set of locations; treated as a separate component with its models can thus develop location risk own validation before it is integrated into analytics and also quantify the risk to a the risk modeling chain. portfolio of assets. Catastrophe loss models are often multi-peril, i.e., they include some or all Consequently, even when models are of the sub-perils associated with a given event, available, they typically fall short: such as wind, surge, and rainfall from a tropical storm, or ground motion, landslide, liquefaction, » They do not model the impact of hazard and tsunami from earthquakes. Catastrophe directly on ecosystems such as coral reefs loss models include multiple hazard-damage or mangroves. “vulnerability” relationships that translate a » They do not consider nonlocal or Safeguarding Marine Ecosystems and Society 43 downstream consequences, such as described in Section 2, coral reefs damaged indirect loss or business interruption. by storms do have the ability to self-repair and Although the most sophisticated models do offset erosion by growing back (UNEP 2024). At approximate business interruption impacts, the same time, the ability of coral reefs to self- these impacts are typically estimated based repair is diminished in the face of other threats on physical damage having occurred at that such as increases in ocean temperature and location. They do not consider wider effects ocean acidity. Regarding mangroves, the peer- on society or the economy. New approaches reviewed literature differs both on the amount to quantify wider impacts such as trade of damage caused by storms and on the time it disruption and indirect losses are emerging, takes for recovery. Factors affecting recovery but the modeling is in its infancy. time include mangrove species, structure, » They do not consider the effect of competition, and changes in geomorphology ecosystems in ameliorating damage. Where (Alongi 2008). protective mitigations or measures are in place, models typically consider only hard Challenges in quantifying the physical protection (such as seawalls), standards of effects of marine ecosystems in protection quantified by national agencies, ameliorating risk or local measures specific to individual The degree to which marine ecosystems properties (such as elevated ground floors provide protection against climate and or hurricane shutters). natural hazards varies depending on a wide variety of factors and hence requires a large Studies such as that undertaken by HR volume of different types of data. But the data Wallingford (2024a, 2024b, 2024c) are collected by research studies is often deficient, valuable in highlighting the complexity of in part because studies do not always record integrating nature-based solutions into the full range of factors that influence natural disaster risk assessments and catastrophe hazard reduction. The result is that there are loss models. not sufficiently robust metrics to use in risk modeling. To help overcome issues with data Challenges in quantifying the impact of in future, studies should collect data not just on natural hazards on the ecosystem and on the natural hazards (e.g., wave height and energy its ability to provide protection attenuation rate), but also on other influencing The large number of factors affecting factors such as the species composition of the ecosystem, physical structure of the ecosystems and the protection they provide, ecosystem, and the hydrodynamics of the and the complexity of untangling their impacts, marine environment. makes modeling challenging and inherently more uncertain than other components of Challenges in quantifying the monetary risk assessment. Not only is the underlying value of protection provided by scientific evidence on these relationships ecosystems limited, but modeling also requires a large volume of site-specific data, which increases Quantifying the economic consequences of the cost of producing risk models. disaster, such as business interruption and lost revenue, is important but challenging. In Part of the difficulty lies in the ability of the Caribbean, for example, the tourism industry some ecosystems to repair themselves. As relies heavily on transport and infrastructure for 44 Safeguarding Marine Ecosystems and Society its operation, with almost all clients requiring Changes in marine ecosystems due to climate sea or air travel. Businesses also need local change (and other time-varying factors) are infrastructure and transport for restocking well documented, as described below, but and other vital activities. Some 45 percent of firms report that if power infrastructure difficult to quantify. was disrupted for one day, their daily revenue would drop by 50 percent or more (Erman et Globally, coral reefs are in decline due to al. 2021); for longer disruptions, the share of climate change. Corals are at risk of bleaching, businesses experiencing a halving of revenues disease, overfishing, and pollution (Webster and would increase. Difficulties in quantifying the monetary value of business interruption due Schindler 2024). Research that models future to different disaster events relate to data changes in coral forecasts a low abundance collection; calculations require site-specific of living coral until the climate stabilizes survey data and local economic data (for (McManus et al. 2021). Analysis by Gardner example local business revenues collected et al. (2003) finds a decline in the absolute by municipalities) that are not always available. coral cover in the Caribbean between 1977 Challenges in quantifying changes due and 2001, with a fall in coral cover from about to climate change and other time-varying 50 percent in the 1970s to about 10 percent factors in 2001 (Figure 17). Figure 17. Decline in Caribbean coral between 1970 and 2001 120 60 Percentage of coral cover 80 40 40 20 0% 0% 1977 1982 1987 1992 1997 2002 Year Estimates of coral cover Number of studies with confidence intervals Source: Adapted from Gardner et al. 2003. Safeguarding Marine Ecosystems and Society 45 Mangroves have also been affected by available, in many countries data are still climate change, as well as population limited. Accurate nearshore bathymetry data encroachment and sea-level rise, so that can be even more sparce (Beck et al. 2018). the area covered by mangroves in the Caribbean has declined in recent decades Summary of information deficiencies (for details see HR Wallingford, 2024c). As of In summary, improved risk modeling requires 2007, the Caribbean region had experienced more evidence in several areas: the second highest loss in mangrove area relative to other global regions, with around » The extent to which ecosystems reduce the 24 percent of mangrove area lost between impacts of natural hazards. Studies must 1980 and 2005 (FAO 2007). Mangroves can collect data not just on the extent to which adapt to sea-level rise by migrating inland and by accreting sediments (Blankespoor et ecosystems ameliorate hazards (e.g., reduce al. 2017; Krauss et al. 2014). But they become wave height) but also on other influencing more vulnerable to sea-level rise in areas of factors, such as the species composition low-relief islands, where there is a reducing of the ecosystem, species’ structures, and elevation in sediments and new sediment the characteristics of the hazards (e.g., wind supply is limited (Alongi 2008), and where speed, hydrodynamics, land gradients, etc.). there is restricted area for landward migration » The amount of damage to ecosystems (Gilman et al. 2008). There is less evidence caused by natural hazards, and the time on how mangroves respond to other climate it takes them to recover, in particular in the change threats such as rising carbon dioxide face of climate change and other human concentrations and temperature change pressures (e.g., pollution). (Alongi 2008; Gilman et al. 2008). » Local infrastructure characteristics and capacity to withstand natural hazards (e.g., Aside from climate change, mangroves waves), with and without marine ecosystems are also affected by coastal development present. There is a need for granular data on and aquaculture as well as deforestation, building type and location, as well as studies diseases, and pollution (Akram et al. that provide more detailed damage curves 2023). These factors can directly cause that include a larger number of risk factors mangrove loss and can limit the extent to (e.g., building structure, materials, etc.). which mangroves cope with changes in the » The extent to which local livelihoods and environment. businesses suffer financial losses after events. In particular, information regarding As living ecosystems, both coral and business interruption and other indirect mangroves also experience seasonal effects is needed. changes and other changes over time, which affect their structure and ability to The data collected on the value of ecosystem ameliorate natural hazards. For models to protection against natural hazards will also accurately quantify damage reduction value be valuable for other important purposes, from ecosystems, they must be based on such as the development of National timely data, such as up-to-date topography Environmental Economic Accounts.9 Many and bathymetry data (Beck et al. 2018). Caribbean countries are advancing their system Although high-resolution coastal elevation of environmental and ecosystem accounts, (topographic) data are becoming more which quantify benefits that society and the 9- United Nations, “System of Environmental Economic Accounting,” https://seea.un.org/es/ecosystem-accounting. 46 Safeguarding Marine Ecosystems and Society economy derive from nature each year, and COMPLEXITY OF IMPLEMENTING where possible estimate a monetary value MARINE ECOSYSTEM INSURANCE for these benefits.10 As stated repeatedly P RO D U C T S T H AT CO U L D above, ecosystems provide a wide array of benefits and services (water and oxygen SUPPORT TOURISM supply, food, genetic resources, areas for The value of new products to insure marine recreation); quantification of these via the ecosystems, including even parametric national accounts would ensure that these vital products (which could be developed despite services are not overlooked in decision-making limited data on ecosystem protection values and that they can continue to provide benefits under different circumstances), may be to society into the future. In the Caribbean, difficult to demonstrate to potential buyers. ecosystem service quantification has focused If it is not possible to model the value of on the value of protection from natural hazards, ecosystem protection from natural hazards, the value of providing spaces for tourism and buyers in the tourism sector will not be able recreation, and the value of fisheries, food, to estimate the expected benefit that would and other marketable produce. Nevertheless, accrue to them from purchasing insurance the data that form the basis for the National for funding ecosystem restoration efforts. Environmental Economic Accounts are still There also remain additional challenges in relatively limited and could be strengthened assessing the likely costs and benefits of by more recent and comprehensive studies. ecosystem restoration after events. The many challenges involved in integrating Assessing cost-effectiveness of ecosystems in disaster risk and insurance restoration and maintenance activities modeling are not insurmountable, however. New technologies could improve modeling To develop ecosystem insurance products and meet some of these challenges (as that disburse funds for ecosystem described in the subsection entitled “Benefits restoration activities after disaster events, for the insurance industry” in Section 2). Use it is necessary to assess how much these of parametric products could also overcome activities will cost, and the extent to which some of the modeling complexities outlined they will successfully restore nature so above, since it does not require robust that it continues to reduce risk. Not all modeling of physical effects. For example, marine sites will require the same types of if global evidence suggests that coral reefs restoration. Different species of plants and protect against storm surges and provide animals are suited to different environments, ecosystem services to a community, and that and different types of activities (for example, coral reefs are damaged by Category 1 storms replanting, dredging to restore hydrographical that pass nearby, all the building blocks of a characteristics) have been shown to produce parametric policy are already in place without different outcomes. hard quantification of all those aspects for the specific location. The unknown risk of damage There is some evidence on both the cost to assets can still be mitigated by placing a of implementing restoration activities, and parametric policy with agreed payouts, limited the extent to which these activities provide only by the budget of insurance purchasers benefits. The evidence for mangroves and who must pay the insurance premiums. corals is summarized below. 10- As indicated by Belize’s national strategy (“Strategy 1: Incorporate environmental sustainability into development planning”), the government plans to introduce natural resource accounting into GDP (Barnett et al. 2011). Safeguarding Marine Ecosystems and Society 47 For the Caribbean, Menéndez et al. (2022) Regarding cost-effectiveness in the found that the median cost of mangrove Caribbean region,12 estimates have assessed restoration was US$23,000 per hectare, that mangrove and reef restoration can be except in The Bahamas, which was cost-effective for flood reduction in over studied separately and had higher median 20 countries (Beck et al. 2022). A hectare restoration costs (US$35,955). These of restored ecosystem is forecast to provide estimates were based on collating data from US$100,000 in flood protection benefits on previous reviews to provide a larger number average (Beck et al. 2022).13 Over 3,000 km of of restoration projects on which to base coast were identified as having the potential cost estimations.11 The type of restoration for cost-effective mangrove restoration required will have significant bearing on investment (Cuba, The Bahamas, and the costs; planting of small mangrove saplings US had the most study units with positive can be relatively cheap, while hydrological investment opportunities), and over 1,000 restoration is more expensive. Maintaining km of shoreline were expected to provide the project after the initial restoration is also areas where coral restoration would be cost- found to be an important factor in project effective (particularly in Cuba and Jamaica). cost (Narayan et al. 2019), and projects Even where restoration costs are relatively costs tends to be lower for larger restoration high, it can still be worth investing given the projects, where there can be economies of high returns expected. scale for one-off fixed costs (such as land permitting, project design, monitoring). With more robust evidence on the cost- effectiveness of conservation interventions, For corals, Bayraktarov et al. 2016 have investors will be able to target high-return evaluated the cost and feasibility of marine activities and channel funding toward coastal restoration. The meta-analysis them. For this to happen, it is necessary for showed that coral reefs tended to have ecologists and conservationists to gather a relatively good survival rate, compared better information on the optimal type of to survival of other restored ecosystems restoration and implementation techniques (64.5 percent). Median cost of coral reef for use in different circumstances. A review restoration projects varied between of coral restoration projects (documented in US$11,717 per hectare, for activities involving the literature and through practitioner surveys) coral reef fragments being transplanted to identified that 60 percent of projects reported the degraded reefs. The costliest coral reef less than 18 months of site monitoring restoration was US$2,879,773 per hectare, (Boström-Einarsson et al. 2020). This limits and used transplantation in addition to other the extent to which success can be assessed activities (stabilizing substrates). The costs and highlights the need for studies to improve and success rates of restoration depend on monitoring and evaluation of restoration the type of restoration and the country or projects. location where they are carried out. Another review found that there can be positive feedback loops between different marine ecosystems; for example, nearby seagrass can reduce disease in corals (McLeod et al. 2019). 11- Herrera-Silveira (2022) assessed the cost of mangrove restoration based on a review of case studies and literature, and Narayan et al. (2019) assessed 72 projects in the Caribbean. 12- Assessments included areas of the United States, Mexico, and other countries within the Caribbean region. 13- This value is the average value that each hectare of restored ecosystem will provide across the lifetime of the restoration project. 48 Safeguarding Marine Ecosystems and Society Limited scalability of financial products putting aside funds for insurance premiums (localized nature of events and difficult or impossible. Most Caribbean tourist heterogeneity in risk across Caribbean firms without insurance reported the cover was Island countries) “too expensive” (Erman et al. 2021). There are high barriers to entry for insurers Insurers also need the product to be seeking to develop products that integrate affordable—that is, the premiums they receive ecosystems into risk models. Modeled- must adequately cover their future losses and loss insurance, which bases payouts on risk payouts. Where insurers face high uncertainty models for events of different intensities and about expected losses, they are forced to forecasts the expected losses incurred, requires increase the price of insurance in order to cover models to accurately predict damage. Modeling the potential for large-scale, unforeseen losses. wave hazards requires site-specific data on For example, the recent price increases in the the hydrological profile of the coast, physical insurance sector have been partially explained geography, and assets that could be damaged. by economic uncertainty (Congressional In addition, factoring in the role of ecosystems in damage reduction, as well as how the hazard Research Service 2023). Faced with higher could affect this, requires a further level of uncertainty over their expected losses, insurers detail. As discussed, the ability of ecosystems must increase their financial reserves and either to provide protection depends on a variety of increase premiums or simply not offer coverage factors (e.g., their structure, condition, extent). for certain events. All these requirements limit the extent to Uncertainty over risks diminishes as risk which risk models can be used over larger models improve. With access to more and geographical areas, and in consequence better information and data, models are better the market scalability. There exists a trade- able to predict losses, and the probability of off between area covered and accuracy; low- errors decreases. Thus, stronger modeling, resolution models can be used over larger areas including incorporation of aspects relating to but are less accurate, while higher-resolution natural ecosystems, is vital. models can more accurately predict risk but are confined to a smaller area. Practical issues in setting up insurance contracts Affordability of insurance product The legal and regulatory aspects of issuing To be viable, an insurance product must be an insurance policy must be considered when affordable for both the client and the insurer. For setting up an insurance scheme. Thought insurance clients (asset owners), it is not optimal must also be given to practical processes to insure all assets against all risks. Where to help overcome hiccups that could affect insurance is expensive relative to the expected success after rollout. Some important aspects value of losses covered, purchasing insurance are highlighted below. is less attractive. In cases where businesses predict relatively small losses from disasters, There should be agreement on the insured they choose to use other means of managing entities as well as the entities responsible for risks. Even in cases where it would make ecosystem maintenance. For an insurance sense to insure, the multitude of other financial product linked to ecosystem conservation pressures faced by asset owners can make to be viable, it is necessary to define not Safeguarding Marine Ecosystems and Society 49 just the legal “purchaser” of the insurance Another issue to be considered in setting product (e.g., the local tourism business or up insurance products is the trade-off government entity that takes out insurance between the benefits provided by restored to cover risk) but also the “owner” of the ecosystems and the potential disruption marine ecosystem that is responsible for its or loss of business they create. Tourism restoration or conservation (e.g., governments, companies might be reluctant to support local municipalities, communities). There must mangrove restoration projects, for example, be arrangements to ensure that the owner responsible for ecosystem maintenance because they could be disruptive to their continues to provide the services over time, business; indeed, given the public’s perception notwithstanding changes in priorities or of mangroves as unsightly, a company might challenges faced. Additionally, thought must judge that mangrove restoration was not be given to the value of the ecosystem to the beneficial and have little incentive to fund business; a dive operator, for example, could restoration activities. not operate if the reef was lost, and therefore has a vested interest in conserving the reef. Mechanisms for disbursement of funds should be also be carefully considered. In In setting up products to insure marine practice, disbursing insurance payouts can ecosystems, care must also be taken to avoid a “tragedy of the commons.” This is the be a challenge in situations where numerous scenario in which ecosystems are degraded small local businesses or community and overexploited because individual actors organizations are the insured entities. In the have an incentive to use them (catch as many Caribbean, the tourism industry includes fish as possible, visit a beautiful beach often, various businesses with potential incentives lead many tour groups) without contributing to purchase cover (hotels, restaurants, sports, to their maintenance; as long as some users eco-recreation tours, etc.), and many will be are not paying, all users will resist doing so small and micro businesses. Insurers may lest they allow “free-riders” to benefit. In this have to offer products that pool risk through scenario, no private actor has an incentive to a local government or other entity that acts own an ecosystem or contribute to the cost of insuring or maintaining it, because its benefits as an intermediary in order to reduce their are available free of charge. A way to overcome administrative costs. this issue that has proved successful for other similar products is the formation of trust Monitoring of ecosystem maintenance is funds, whereby local actors agree to jointly required. For insurers to have faith in the value fund insurance with the understanding that of the ecosystem services being provided, this will benefit everyone. Private actors pay they will need assurance that effective into the trust fund, which purchases insurance maintenance is being undertaken. The teams and oversees ecosystem restoration activities of ecologists and conservationists going out on their behalf. This solution was used by into the field to implement coastal ecosystem products such as the Quintana Roo Reef Protection insurance, which developed the recovery may be required to provide progress Trust for Coastal Zone Management, Social updates and periodic monitoring, which will Development, and Security (see Figure 3). increase the administrative costs of offering these products. 50 Safeguarding Marine Ecosystems and Society Key findings and areas for future research STOCK PHOTO Travel and tourism is a vital part of economies conservation community. Insurance coverage in the Caribbean, but natural hazards and reduces the risk that funding designated for climate change pose risks to the economy strengthening ecosystems will be pulled away and tourism sector. Natural assets and after a disaster and redirected toward other ecosystems can provide protection against urgent financial pressures (e.g., human asset the risks posed by natural hazards through restoration and recovery). the ecosystem services they provide. One of the vital services provided by ecosystems Research has highlighted the challenges is coastal protection from hazards such in developing ecosystem-linked disaster as storm surge waves. However, marine insurance. A particular challenge is developing ecosystems can suffer in the process of risk models that incorporate ecosystem protecting against various natural risks. effects in disaster risk quantification. These Natural assets that suffer direct damage are required for modeled-loss insurance and during a hazard event (e.g., from wind and indemnity insurance products, and can also waves) are then less able to provide future serve to identify locations that could most protection and other ecosystem services to benefit from insurance for restoring and society. Climate change and human pressures maintaining ecosystems. can add to their decline. The linkages between marine ecosystems, It is possible to restore and conserve the extent to which these systems ameliorate ecosystems so they continue to provide vital natural hazard events, and the way that ecosystem services, but these activities—and climate change influences both factors investment in ecosystems more generally— are not well understood, and as a result require finance, which insurance can provide. accurate inclusion of ecosystem effects in Insurance offers a way to access funds after risk modeling is limited. More evidence is also hazard events occur that could be beneficial needed on the cost and benefits of ecosystem to tourism operators as well as the ecosystem restoration activities. Safeguarding Marine Ecosystems and Society 51 These benefits are not limited to damage Governments and relevant institutions reduction and recreation and tourism value; could take specific actions to promote and other relevant ecosystem services include facilitate improved data collection within their benefits to fishery stocks. localities, and could also share the data so they can be fully harnessed. The insurance Because many localized, situation-specific and technology sectors could collaborate factors influence ecosystems and losses to improve data collection, dissemination, from natural hazards, certain insurance and use by highlighting existing data gaps products may have a limited potential client and technology solutions that should be base for each risk model they develop. To prioritized. Several data gaps are identified account for the complexity of ecosystems and in this report: the extent to which ecosystems interactions with disaster losses, risk models reduce impacts of natural hazards; the require use of large volumes of many types of amount of damage to ecosystems caused by data. Consequently, it is often not feasible to natural hazards and the time it takes them to extrapolate or generalize risk models for use recover; granular data on local infrastructure over large geographical areas. This constraint characteristics and its capacity to withstand limits the return on investment for insurers— natural hazards, with and without marine that is, the costs of modeling local risk are ecosystems; and the extent to which local high, while the potential markets that products livelihoods and businesses suffer financial can serve are small. losses after events. This report points to several opportunities 2. Explore possibilities for insurance and ways forward for developing ecosystem design insurance. Despite the challenges facing Appropriate insurance design offers another efforts to develop such insurance, advances way to overcome modeling complexities. are possible and could benefit both the While both modeled-loss insurance and insurance sector and Caribbean tourism indemnity insurance require a robust industry. quantification of likely losses and risk reduction to ensure that they are efficiently and 1. Use new technology fairly priced, parametric insurance does not. New technologies could help overcome the Pricing of parametric products is based solely challenges of modeling an ecosystem’s on the expected occurrence of a pre-agreed interaction with natural hazards. This event and a pre-agreed payout if the event interaction is highly site-specific, and thus occurs. Consequently, parametric insurance increases the model’s data requirements can be an option even in situations where and limits its use over larger geographical neither the physical effects of the marine areas. But satellite-imagery, mobile data, and ecosystems nor the impact of natural hazards machine learning offer powerful tools that on them can be robustly modeled. At the same could address this problem. They could fill time, it is still necessary to communicate the gaps in knowledge—not only about how events value of disaster insurance to buyers. Risk affect human-made assets, but also about modeling and forecasting of expected losses how events affect ecosystems and the extent can provide motivation to buyers, as well as of their ability to protect against hazards and highlight to the insurance industry which areas offer other services to society. could benefit most from insurance offerings. 52 Safeguarding Marine Ecosystems and Society Parametric and modeled-loss products may be The insurance industry could act as a suitable when the timeliness of post-disaster catalyst for ecosystem insurance products restoration is critical as is the case for some by collaborating with environmental ecosystems. More broadly, the more quickly an stakeholders, including development ecosystem can be restored after an event, the institutions. Such collaboration could sooner it can return to providing the full range promote investment in ecosystem resilience of ecosystem services to society—including activities as part of programs focused on protection from hazards, food provision, and ensuring livelihoods, economic development, areas for tourism and recreation. and sustainable tourism. For example, Munich Re and The Nature Conservancy recently To account for the disaster risk mitigation designed a method to combine community- benefits of ecosystems in the design of based insurance along the Mississippi River insurance and premiums, existing insurance with ecosystem maintenance activities that product design offers relevant approaches. improve flood prevention (Munich Re and The Accounting for risk mitigation is a common Nature Conservancy 2021). Initiatives like this and successful practice in primary insurance one, or like the Quintana Roo Reef Insurance, policies throughout developed insurance could be explored for the Caribbean and could markets (including in insurance regulation); leverage regional entities such as CCRIF SPC insurers offer premium reductions for risk and the Caribbean Biodiversity Fund. mitigation and incentives for protecting property and businesses. It would be helpful Going forward, the insurance industry could to explore how these approaches could be promote ecosystem insurance products by used to support ecosystem resilience. The drawing on its experience in developing practical issues raised in this report—about products for other purposes. Although setting up insurance contracts and agreeing on modeling the disaster risk reduction benefits the insured entities and the entities responsible of marine ecosystems is still a novel area, for ecosystem maintenance—require attention there has been more experience of modeling in this context. and financing wider disaster risk reduction investments and incorporating them into Governments can also take action to explore insurance product pricing. Lessons might new insurance designs. Governments can be learned from the insurance, risk modeling, conduct initial assessments to identify regions and engineering worlds to help guide this or localities that depend heavily on ecosystems agenda. Other experts (e.g., in technology (such as areas with high revenues from or data science) could offer complementary coastal and eco-tourism, areas with important solutions to aid in advancing risk modeling. agriculture or fisheries economies), so that Once improved risk models are developed, these could be targeted for financial protection other key players (governments, businesses) against natural disasters. Areas identified as could be vital partners in product development. both highly important for the economy and These collaborative efforts should learn from highly dependent on ecosystems would be relevant existing insurance products, and in most likely to benefit from financial protection particular be guided by how successfully against disasters. they were implemented. Governments and interested organizations could assess 3. 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