Having dealt with climate-related events for hundreds of years, the insurance industry has evolved to meet some of the challenges associated with climate risk. If we look at the history of the insurance industry, we can see how some of these developments may suggest ways to meet biodiversity challenges, and also how they point to new issues that may arise in relation to climate change and biodiversity. The expertise and financial resources of the insurance industry should be leveraged to urgently address biodiversity risk and transform our relationship with nature.[i]
Insurance can promote investment in biodiversity through asset protection, liability reduction and facilitation of capital inflow from the financial markets. Ideally, efforts to protect biodiversity will include a combination of instruments, not only insurance. While insurers, as investors, can contribute directly to the preservation of biodiversity by channeling capital towards biodiversity-positive investments, opportunities to do so are still limited.
This June, the Stockholm+50 international meeting will engage key stakeholders from around the world towards achieving sustainable development. Recognizing and capitalizing on opportunities for the insurance industry to halt biodiversity loss and restore ecosystems should be a priority at Stockholm+50.
Our recently published paper, Insuring Nature’s Survival, explores how and to what extent insurance can play a role in meeting the increasing financial needs to protect biodiversity. It outlines how the insurance sector, as underwriters, may impact and protect against biodiversity risks, leveraging approaches to climate change and catastrophe risk to highlight key opportunities and challenges that exist for insurance-based solutions for biodiversity.
The following five recommendations show how the insurance industry can play a role in protecting biodiversity:
- More needs to be done by policy makers and regulators to incentivize market participation in insurance solutions. The insurance industry needs to be more closely involved in developing the taxonomies and reporting requirements for measuring biodiversity. It was announced in March 2022 that the International Sustainability Standards Board (ISSB) will consolidate the work of the Value Reporting Foundation, Climate Disclosure Standards Board (CDSB), TCFD and World Economic Forum. ISSB standards are expected to be adopted worldwide, albeit with some differences driven by local regulators and in some cases on a voluntary basis. However, international companies listed on the stock exchanges in the UK, EU, or US will have to report on a consolidated global basis, and this can represent a blueprint for companies in emerging markets to follow. Investors and insurers may also be interested in biodiversity projects in developing countries as a way to diversify.
- The challenges in pricing biodiversity risk, which is notably separate from public accounts, should be addressed. The Dasgupta Review, an independent report on the economics of biodiversity, highlights the need to address this issue, and there are several frameworks that exist to account for the economic value of natural assets. However, these have not been linked to the core public accounts of nations. For decades, the insurance industry has used catastrophe risk models, which use past events to make estimates of what future losses could look like, but many of these do not currently take climate change into account. Rather than rely on historical, backward-looking data, climate models provide forward-looking simulations of the interaction between energy and matter in the ocean, atmosphere, and land, based on emission levels of greenhouse gases. While the future is uncertain, climate models enable the projection of temperature, precipitation, and other weather-related conditions and events over the next several decades – important information that helps define physical loss.
- To adequately address biodiversity risk, the public and private sector need to collaborate, and regional risk pools may have a role to play in the development of cost-effective solutions. Regional risk pools exist to serve the needs of their members, and if nature-based insurance is in demand, then risk pools are well placed to invest in research for product development. Enabling the valuation of natural capital and its ecosystems in monetary terms is a much-needed step toward ascertaining a market price to underpin financial solutions. The Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company (CCRIF SPC) has introduced the first ecosystem livelihoods product via the Caribbean Ocean and Aquaculture Sustainability Facility (COAST) initiative, but much more could be done.
- Insurers can play a role as both underwriters and investors to simultaneously promote investment in biodiversity-positive activities and to help discourage biodiversity-negative activities. The insurance industry can impact the market by the way it allocates capital, both on the investment and the underwriting side. For example, Dai-ichi Life invested $32 million in a green bond whose proceeds are limited to biodiversity conservation, in a green bond issued by Anglian Water Services Financing PLC (“Anglian Water”). Insurers can also discourage biodiversity-negative activities by excluding certain sectors as many insurers already have with coal for example. Insurance can also be used as part of a range of solutions to mitigate risk and encourage investments that protect or enhance the natural environment.
- While nature-based insurance can incentivize investments in adaptation and facilitate access to rapid liquidity, it will not address all risk. Insurance plays a limited, but important role by incentivizing adaptation and providing financial protection for when an acute climate or biodiversity shock happens. For some emerging economies that rely on their ecosystems as a source of livelihoods or broader economic gain (for example, through tourism) and that previously relied on donor support to make insurance affordable, it may be challenging to start paying an insurance premium with national resources. However, moving in this direction, even partially, can provide the right incentives for proactive planning and risk-informed investments in adaptation.
Combining ecological action with financial protection can make good economic and financial sense and help overcome the pricing issues associated with biodiversity risk. Investing in biodiversity and ecosystem restoration can reduce the risk of damage from natural catastrophes. Reducing the risk of damage may have an impact not only on the cost and availability of insurance for people, families, and corporations, but also on the cost of capital for both companies and governments.
While some products are emerging, like the Meso American Reef Product, wild fire catastrophe bonds and others, it remains to be seen how much demand there is for the products and how much further this innovation can be taken. We look forward to seeing further innovation by the insurance sector to manage climate and biodiversity risk in the future. We also look forward to seeing these issues and innovative solutions discussed in depth at the Stockholm +50 meeting in June 2022. The insurance industry needs to be part of the conversation to help mobilize the finance needed to support adaptation and resilience to climate and biodiversity risk.
Read the full report: Insuring Nature's Survival: The Role of Insurance in Meeting the Financial Need to Preserve Biodiversity.
[i] “Transforming our relationship with nature” is the first issue area of Stockholm+50’s Leadership Dialogue 1, “Reflecting on the urgent need for actions to achieve a healthy planet and prosperity for all.”
