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Premium Protection: Why Insurers Are Eager to Cover Coral Reefs

As hurricanes become more destructive in a warming climate, coral reefs protect coastal property worth billions of dollars. Now Mexico is taking out the world’s first insurance policy on a coral reef to ensure its restoration after storms strike.

Written by Todd Woody Published on Read time Approx. 9 minutes
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The Mesamerican Reef off the Yucatan peninsula in Mexico.DeAgostini/Getty Images

PUERTO MORELOS, Mexico – Five hundred yards offshore of this tourist village on the Yucatan peninsula, iridescent butterfly fish and parrotfish dart among the branches of staghorn coral. Barracudas and a lone ray weave around tawny-colored brain coral and undulating purple sea fans as we snorkel over the northern reaches of the 600-mile-long (1,000km) Mesoamerican Reef, second only to the Great Barrier Reef in size. Anchored nearby are three boats filled with tourists, some of the 12 million visitors who flock each year to the high-rise hotels lining white-sand beaches in Cancun to the north and to the low-key but luxurious resorts that stretch to the south in Playa del Carmen.

The reef’s real value, though, lies not as a tourist attraction but as a bulwark that protects this stretch of coast and its $9 billion tourist economy from hurricanes. Studies conducted after Hurricane Wilma slammed into the Yucatan in October 2005 with 150mph (240km/h) winds showed that the reef dissipated 90 percent of the wave energy from the storm surge. That left the beaches in Puerto Morelos and points to the south intact. But in Cancun, which is not protected by the reef and where beach-nourishing sand dunes have largely been paved over, Wilma stripped the beaches bare. That shut down the tourism industry for months until the sand could be replenished at a cost of some $30 million.

The line of defense provided by the Mesoamerican Reef, however, is crumbling. That becomes clear when our boat motors further offshore to where waves are breaking on the outer reef. There are no tourist boats here and it’s easy to see why – it’s a marine desert, lacking the complex coral structures that shelter colorful fish and break waves. “That’s a sign of decline,” says Fernando Secaira, director of climate and risk resilience for the Nature Conservancy in Mexico. “Compared to 25 years ago when I first swam here, the biodiversity is low and declining – you don’t see big fish anymore.”

While coastal pollution, disease and coral bleaching over the past two decades have contributed to the degradation or loss of 80 percent of the Mesoamerican Reef’s live coral cover, increasingly destructive hurricanes play a major role in the devastation. A Category 4 or 5 hurricane such as Wilma can result in a loss of as much as 60 percent of a reef’s live coral cover in the year following the storm, according to Secaira. A study by the Nature Conservancy found that a loss of 3.2ft (1m) in the height of a reef significantly reduces its ability to absorb wave energy, more than doubling the cost of coastal damage. In this spot, large chunks of elkhorn coral lay toppled on their sides, a sign of past storms’ ferocity. A small-scale restoration effort has been underway – a healthy transplanted elkhorn grows amid the skeletons of dead corals, and nearby sits a coral nursery – but the efforts are at best a Band-Aid for a reef in seemingly terminal decline.

That could soon change. On March 8, the Nature Conservancy and the state government of Quintana Roo announced the creation of a Coastal Zone Management Trust that will purchase the world’s first-ever insurance policy for a coral reef. If a Category 4 or 5 hurricane hits a 37-mile (60km) stretch of the coast, the policy would be triggered and a payout immediately made to finance the repair and restoration of the reef. It is likely the first of many such policies as the insurance industry moves to rate ocean-related risks to coastal property as climate change accelerates. Here in Mexico, that financial mechanism already is spawning a reef restoration ecosystem of responders and coral nurseries.

Hurricane Wilma destroyed this Cancun beach in October 2005. (Marte Rebollar/AFP/Getty Images)

“Swiss Re has risk appetite for this and other insurers have a risk appetite for this,” says Martyn Parker, chairman of global partnerships for insurance giant Swiss Re, during the Economist World Ocean Summit last week in Playa del Carmen. “It’s a fantastic step forward. I think it is the beginning. The next number of reefs that are covered will mutualize the risk.

“Reefs protect so much, they’re unsung heroes,” adds Parker, whose company, the world’s second largest re-insurer, worked with the Nature Conservancy on the reef insurance project. “They protect the beach being from washed away, the infrastructure behind that, the fisheries.”

Paul Jardine, executive vice president and chief experience officer at insurance company XL Catlin, says the next step is to create a portfolio of insured reefs worldwide.

“To me, the reef is an easy sell,” he says at the World Ocean Summit. “One of the problems we have when we think about the ocean is that most people think of it as a free asset. And when we think of the value of ocean eco-services, we’re not allocating that back to industries and businesses.

“I would take it one stage further,” he continues, “and say if you can get to this overall concept of ocean risk and you can build an indexed product that looks at the whole range of risk, not just reefs, but ocean acidification, rising sea levels – all of that – suddenly you have a risk-transfer mechanism that provides society with resilience.”

That means rewarding governments and businesses that take action to reduce ocean-related risks, such as conserving coral reefs by reducing pollution or establishing no-fishing zones.

“If you are protected by a healthy reef, then we know you’re in a lot better shape if a hurricane hits than if you’re not,” says Mark Way, corporate climate lead at the Nature Conservancy and a former Swiss Re executive. “Shouldn’t that be reflected in your insurance premium?”

Unlike traditional insurance, the Mesoamerican Reef would be insured under a “parametric” policy that would immediately pay damages for its restoration if certain conditions occur – in this case, if a hurricane strikes within a defined distance of the reef and coast with wind speeds that exceed 125mph (200km/hr).

“As storms occur, the coral reef will continually be repaired,” Mark Tercek, the Nature Conservancy chief executive, told Oceans Deeply at the World Economic Forum in January. “If any sector of society is thinking hard about the big risks that come from things like extreme weather, it’s the insurance sector. They do much better appreciate how green infrastructure can provide protection.”

Coral restoration project leader Claudia Padilla (right) explains how her lab is growing coral using the microfragmentation technique. (Todd Woody)

The Nature Conservancy began working on the reef insurance project in 2014, spending years building support for the trust fund among local, state and federal officials and the hotel owners association. To make the case to insurers, the group’s researchers had to correlate hurricane wind speeds with damage to corals as well as quantifying the value of the protection provided to beaches and infrastructure by the reef.

Cancun’s beaches, for instance, are not sheltered by the Mesoamerican Reef but depend on it for sand. “This is from corals,” says Secaira, picking up a handful of sugar-white sand from a Cancun beach and pointing toward the south, where currents transport it from the reef. As the reef’s health has declined, so has sand production and the natural replenishment of Cancun’s beaches, which are already shrinking as dunes have disappeared under a wall of hotel towers.

Persuading the politically powerful hotel owners to join and help fund the Coastal Zone Management Trust was key. Since Hurricane Wilma, hotels have paid a 25 percent surcharge to repay the cost of the post-storm beach replenishment. The $2 million generated annually by the surcharge will go to the trust to help fund the reef insurance policy premium and other conservation efforts.

“We’re OK paying it as long as it goes for the right purposes,” says Miguel Angel Diego, manager of the Zoetry Paraiso resort, a secluded $900-a-night, 99-room hotel on the Riviera Maya between Cancun and Playa del Carmen. “I think everyone is very aware of the necessity to do restoration. The reef and beaches are the reason people come here. Without tourism, the state would not exist.”

Diego, a representative of the local hotel owners’ association, says business was won over by the structure of the trust and safeguards against corruption.

“The insurance gives us a new level of control,” he says. “That money is being paid to an insurance company and it’s only going to come out when there’s a need for it. One of the reasons we’re excited about this new trust is it’s a way of creating a structure that has a lot of controls, has participation from industry and will give us more transparency and control over how that money is being spent and the decisions being made.”

For the state government, the insurance policy guarantees there will be money to pay for coastal restoration after inevitable hurricanes. “The idea is not to just wait for a hurricane to hit but for preventive management of the coastal area,” says Alfredo Arrellano, minister of environment for the state of Quintana Roo, during a lunch at a restaurant overlooking the reef in Puerto Morelos. “The reef is part of the world’s heritage, not only Mexico’s.”

Staghorn coral being grown at a laboratory in Puerto Moreles, Mexico. (Todd Woody)

The value of the insurance policy and other details, such as the annual premium, won’t be known until the trust puts it out to bid and secures a contract with an insurer. (Also unknown is how premiums or a payout would be affected if multiple hurricanes strike in a season before repairs to the reef can be made.) But in a recent presentation, Secaira gave an example of a $15 million risk in lost tourism revenues from a hurricane strike. Yearly premiums would range between $100,000 and $400,000, with a payout of between $2 million and $8 million, depending on the damage from the hurricane and the extent of repair and restoration of the reef.

The aim is to put a policy in place by June 1, the start of the 2018 hurricane season. The Nature Conservancy, the Puerto Morelos Reef National Park and other local organizations are already training coral rapid response “brigades” that will mobilize in the aftermath of a hurricane. Within two days, crews will begin to clean out debris from the reef and collect broken coral.

Those fragments will likely be taken to the Center for Research in Aquaculture and Fisheries in Puerto Morelos. At an outdoor laboratory overlooking waves breaking on the distant reef, technicians carefully tend to corals growing in shallow dining table-sized outdoor saltwater tanks. “We’ve been testing different techniques for coral restoration,” says Claudia Padilla, the director of the project, which began in 2016.

In some tanks, chunks of coral are cemented into small round planters and fed nutrients as humming pumps circulate water. Using the traditional “fragmentation” technique to stimulate coral reproduction, the corals were split into pieces and will be grown in the tanks for a year and then transferred to a reef for transplantation.

Corals being grown in Puerto Moreles, Mexico, using the microfragmentation technique. (Todd Woody)

In other tanks, the researchers are experimenting with a newer technique called “microfragmenting” developed by the Mote Marine Laboratory in Florida. Tiny pieces of coral are placed on grids that resemble jeweler’s trays. For reasons that are not entirely understood, microfragments of coral grow much faster, aggregating into masses that can be transplanted like skin onto the skeletons of dead reefs or artificial structures. “It’s more like a tissue and it allows us to grow the colonies more rapidly, at 10 percent of the cost,” says Padilla.

Over a three-year period following a hurricane strike, the corals grown at the lab will be transplanted over a large area of the reef with the goal of restoring its height and thus its ability to protect the coast.

“You need to have the whole community very aware and trained and have the tools for a rapid response,” Isabel Studer, executive director of the Nature Conservancy Mexico and Northern Central America, said at the World Ocean Summit. “If this doesn’t happen very quickly, it’s very difficult to restore the reef. The insurance will provide the money that will not otherwise be present for this kind of response.”

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