P&C the Jan/Feb 2020 issue

Ocean Risk and Resilience

Global collaboration is needed to build coastal resilience.
By Greg Hendrick Posted on January 14, 2020

With approximately 40% of the world’s population living within 63 miles of the coast, ocean changes have the potential to directly impact billions of lives. As numerous tragic events in recent years have shown us, flood and storm surge can result in huge loss of life and affect livelihoods, homes and communities.

This is a costly problem for society. Over the past 10 years alone, insurers have paid out more than $300 billion in coastal flood damages. But this figure is dwarfed by the amount that governments and taxpayers have had to pay to rebuild coastal communities.

According to the Insurance Development Forum, about 70% of natural catastrophe losses worldwide are uninsured. In middle-to-low income countries, that figure rises to around 90%.

Without mangroves, which are being depleted at an alarming rate, it is estimated that more than 18 million people in coastal communities would incur an additional $82 billion in flood damages every year.

This protection gap—the difference between economic losses and those covered by insurance—is a real and pressing concern.

For us as re/insurers, it is imperative to find ways to help coastal communities build economic, ecological and social resilience by getting them back on their feet as quickly as possible after these terrible events.

But no single company, government or NGO can hope to tackle a problem of this complexity and magnitude on its own. It requires us to work and innovate together.

That is why we are excited to have helped lead the establishment of the Ocean Risk & Resilience Action Alliance (ORRAA), a first-of-its-kind collaboration between the finance and insurance industries, governments, and environmental civil society organizations.

ORRAA aims to pioneer groundbreaking products that incentivize blended finance and private investment into coastal natural capital, such as coral reefs, coastal wetlands, mangroves and sustainable fisheries.

There is no shortage of private capital available, but several barriers—including a lack of data and a limited pipeline of risk-adjusted investable projects—have meant that, until now, potential investment has remained largely untapped.

A major part of ORRAA’s work will be to remove those barriers and, by placing a value on natural capital—that is, those parts of the natural environment that provide valuable goods or services to people—to enable the development of investment opportunities.

Work in Progress

ORRAA members are already involved in some innovative projects. For example, at AXA XL we have been working with The Nature Conservancy, a not-for-profit charitable environmental organization, to create a groundbreaking investment product: Blue Carbon Resilience Credits. These bring together the innovative credit system of blue carbon offsets with the completely new concept of resilience credits to create a new investment stream for large-scale wetland conservation and restoration projects. Resilience credits are designed to fund infrastructure projects and assist with strategies to help communities become less vulnerable after a catastrophe.

Coastal wetlands capture vast amounts of greenhouse gases and act as protective flood barriers. Mangroves can store up to 10 times more carbon per hectare in their soils than can terrestrial forests, while about 300 feet of mangroves can reduce wave height by as much as 66%. Without mangroves, which are being depleted at an alarming rate, it is estimated that more than 18 million people in coastal communities would incur an additional $82 billion in flood damages every year.

The key to making projects like these happen is research, science and knowledge. One of the skills that the insurance and financial community can bring to the table is the ability to model future risks in a probabilistic way.

Last year, The Nature Conservancy, with support from AXA XL, began work on a resilience credit that values the combined carbon sequestration and coastal protection benefits of coastal wetlands. They are currently working to finalize an assessment of the blue carbon sequestration value of the mangrove, marsh and seagrass sites best positioned to generate the first round of Blue Carbon Resilience Credits. Those credits will enable buyers to offset their carbon footprint, ensure the health of wetland ecosystems, and protect coastal communities.

Further projects include developing microinsurance products for loans to incentivize sustainable fishing practices and parametric insurance products for coral reefs to fund maintenance and restoration efforts after tropical cyclone events.

The keys to making projects like these happen are research, science and knowledge. One of the skills that the insurance and financial community can bring to the table is the ability to model future risks in a probabilistic way. If we can clearly demonstrate to public and private policymakers the risks of ocean change, then they can begin to take concrete and cost-effective action.

The Ocean Risk & Resilience Action Alliance aims to bring organizations from a range of sectors together to collaborate on ideas and to leverage public funds that will help to scale up private investment in natural capital. Working together, we believe we can regenerate and revitalize coastal ecosystems for the benefit of generations to come.

Hendrick is chief executive officer of AXA XL.

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