An Insurance Policy for Coral Reefs

Written by Jake Kheel, Grupo Puntacana Foundation

When we think of natural ecosystems, we rarely imagine them as fixed assets, much less resources that deserve an insurance policy. Recently, however, partners in Cancun, Mexico announced a new insurance policy for the nearby coral reef. The policy used a new and innovative financial model to confront the consequences of storms, hurricanes and the effects of climate change.

In this model, local hoteliers take out an insurance policy with the renowned insurance company Swiss Re, with backing from the Mexican government. Experts from The Nature Conservancy quantify the economic value of a healthy coral reef based on its ability to defend human, economic investments. If a natural event impacts the reef, the insurer quickly assesses the damage caused and disburses funds to carry out reef restoration actions. TNC is charging with monitoring the health of the reef before and after the event to quantify the damage.

The hotels pay an estimated $1 to $7.5 million dollars into a fund to restore the reefs and beaches affected by a storm. Response payment after a storm is estimated to be between $25 to $75 million dollars. The insurance payment would be “parametric,” meaning the fund will be dispersed immediately after quantifying the damage to the reef, allowing quick efforts to restore the reefs and affected beaches.

This new economic model recognizes the critical service reefs play in preventing damage to the tourism industry in Cancun. TNC estimates that for every meter of reef lost, the cost of damage from a storm triples. The tourism industry in Cancun is recognizing the reef as an asset that requires preventive insurance.

In the past, hoteliers in Cancún assumed the cost of storm damage themselves, through increased taxes. In 2005, for example, Hurricane Wilma caused $7.5 million dollars in coastal damage. The tourism industry paid the majority of the recovery costs to the Mexican government, a process that was agonizingly slow and deeply impacted local businesses. Beginning in 2018, the new policy will facilitate a fast and more direct response.

This financial mechanism is very promising for countries in the Caribbean, whose economy depends on its coasts and tourism. In its “Ocean of Wealth Atlas” project (http://maps.oceanwealth.org/), TNC estimates that Caribbean countries receive hundreds of millions of dollars annually in protection services from local coral reefs. In order to confront the increasing risks of severe weather and climate change, the Caribbean tourism industry is going to need to develop innovative financing for protecting its natural assets.