Appetite grows for nature risks but data challenges remain

By Rebecca Delaney

April 11 - (The Insurer) – There is appetite in the London specialty market to write credit and political risk covers for further debt-for-nature conversions, although this requires more centralised and reliable data sources to inform pricing and structures.

Two years ago, the Lloyd’s market supported a debt-for-nature swap that allowed Ecuador to exchange $1.628 billion of government bonds for a $656 million loan at significantly reduced repayment rates.

The U.S. Development Finance Corporation provided $656 million in political risk insurance, which was reinsured by the Lloyd’s market to enhance the attractiveness of the asset class to investors.

Under the deal, savings are to be invested in marine conservation to promote nature restoration. Other countries that have successfully completed debt-for-nature transactions include the Seychelles, Belize, Barbados and Gabon.

Reflecting on the Ecuador deal, MS Amlin’s head of sustainability Amir Sethu said the transaction was unconventional when it was written, but has since garnered positive feedback.

“My sense is that, amongst us, there's been lots of learning, and we have an appetite to do more of that going forward,” he said.

Sethu moderated a panel on the intersection of nature and disaster risk reduction last month as part of the Sustain Festival. Convened by Better Insurance Network, the festival marked the first coordinated programme of events dedicated to insurance innovation opportunities in sustainability, climate and resilience.

Jamie Cleary, head of credit and political risk insurance at MS Amlin, highlighted that there were several challenges in underwriting the transaction, including pricing and limited appetite to deploy long-term capacity in emerging markets.

“From the credit risk perspective, the quality of that credit is very key. In the voluntary market, we would expect investment grade, and we don't really see that often. If it's non-investment grade, it would need to have forms of guarantee,” said Cleary.

“We're relying on a lot of aggregate data, we don't really have massive amounts of data and history with underwriting risks of this nature. We're a little bit in the dark most of the time when we're looking at new initiatives like this, so we're looking to see more of a flow from regular reliable sources.”

He added that in order for underwriters to continue to be high-quality subject matter experts in their respective lines of business, investment in analytical capabilities in necessary.

“The idea is to get those specific analysts to enable us to make better decisions and challenge information that we receive, rather than wholly depending and trusting everything that we receive,” he said.

“That's probably where we're heading, but it does take additional investment, and it would require insurers to push the agenda internally to allow that to happen.”

Oliver Withers, head of nature at Standard Chartered, affirmed the role of the (re)insurance sector in tackling nature risks during the panel.

“As we start unpacking all of this and understanding what the risks are, it's only going to accelerate our ability to bring in the insurance sector and really mobilise that capital at scale,” he said.

“We're on the brink of some really exciting stuff. But, I will be honest, data remains a challenge. I can't come to MS Amlin and expect them to underwrite risk if we don't have the data.”

NatCap CEO Sebastian Leape added that data access for underwriting is difficult as nature is highly location-specific.

“Unlike climate data where a ton of CO2 anywhere in the world is roughly equivalent, the impacts and dependencies on nature are very locatio-specific,” he explained. “Having access to the location of a company's operations or their supply chain is important in determining the true material impacts and dependencies.”

Leape added that this is further complicated by the lack of a single measurement for nature that is recognised by the scientific community.

“There are lots of metrics across multiple different layers. You want to understand the state of nature in and around a particular location, the pressures that a company is subjecting nature to through their activities, and you want to measure the response,” he said.

He continued that addressing the double materiality of nature for insurance companies generally falls to the underwriting teams within the business, including what is insured, how it’s insured, promoting more sustainable actions, and engaging customers in product design.

“For insurance there is this complication, by virtue of the fact that you have the underwriting business alongside the investments and own operations,” Leape concluded.

“In our experience, working with insurance companies is one of the most exciting bits of the whole economy that can really make a difference and actually is incentivised to make a difference. It's a very exciting sector to be in from which to address this challenge.”