Swiss Re Institute: Insurers have "skin in the game" to incentivise nature investments

By Rebecca Delaney

Feb 12 - (The Insurer) - Swiss Re Institute has called on insurers to better integrate the benefits of nature into risk assessment and overall insurance decision-making, following research that found that natural habitats can reduce insurance loss frequency by around half.

The reinsurer's research arm conducted a study of Florida coastal areas and flood insurance losses between 2009 and 2022.

With more coastal property exposed to storm surge than any other US state, Florida coastal flood losses are generally caused by higher frequency, lower severity storms.

Over the measured period, nearly 40 percent of claims under the National Flood Insurance Program in coastal areas were attributed to lower severity events (up to Category 3 hurricanes), representing $1.15bn in paid insurance losses.

Swiss Re Institute cross-referenced the claims data with geospatial insights from the coastal protection layer used in its biodiversity and ecosystem services index, with this layer representing the modelled coastal risk reduction due to the presence of coastal natural habitats, including coral reefs, mangroves, seagrass meadows and salt marshes.

Isolating coastal areas with high protection for biodiversity and ecosystem services and comparing claims frequency to those with less protection found that areas with high biodiversity and ecosystem services coastal protection saw, on average, 1 percent of insurance policies report a claim in a month with a flood event, compared to 2.8 percent in areas with less coastal protection.

The size, area and form of the natural barrier can all contribute to reducing storm surge impact.

Swiss Re Institute said it consistently observed a reduction in loss frequency of between 42 percent and 65 percent in areas with high biodiversity and ecosystem services coastal protection, leading to the conclusion that natural habitats can reduce loss frequency by "around half".

The report called for insurers to work closely with local stakeholders to support the preservation and maintenance of ecosystems that contribute to natural coastal protection.

It also recommended that insurers leverage data to integrate the benefits of nature into risk assessment and overall insurance decision-making, as these protections can help to maintain the insurability of properties and communities.

"The insurance industry can play an important role in supporting the preservation and upkeep of ecosystems. Incentives are aligned here, and as this study clearly shows, we have skin in the game," commented Gillian Rutherford, head of sustainability markets at Swiss Re.

"By leveraging data on coral reefs, mangroves and salt marshes, (re)insurers can integrate the benefits of nature into risk assessments, deploy solutions to indemnify coastal habitats in the face of natural disasters, and guide investments into nature-based solutions. Such forms of coastal protection can contribute to more resilient properties and communities and to their insurability."

Existing insurance solutions to indemnify coastal habitats to enable swift restoration following a major storm include Swiss Re's involvement with the UN Development Programme's Insurance & Risk Financing Facility to develop parametric/hybrid insurance products to protect and restore coral reefs in Indonesia.

Elsewhere, in September last year, Axa Climate was renewed as insurance capacity provider for the fourth annual placement of the Mesoamerican Reef Fund’s insurance program, placed by WTW.

Earlier that month, Axa Climate had partnered with ClimateSeed and Axa Seguros Mexico to develop a parametric insurance product to protect fishing communities responsible for the restoration of mangrove forests in San Crisanto, Mexico against the impact of hurricanes.