The article below was first published in Asia Insurance Review.
1 August, 2022
Turning to mangroves to improve insurability of assets
Insurers in the Philippines are collaborating to factor the value of mangrove forests into portfolios, underwriting processes and business development opportunities to improve the insurability of assets. Asia Insurance Review spoke to Earth Security’s Mr Alejandro Litovsky and PIRA’s Mr Michael Rellosa about potential mangrove projects in the pipeline.
Mangroves are not just a source of natural carbon capture and storage; they save an estimated $65bn per year in avoided losses from floods and storms and can be 50 times more cost-effective at resisting storms than building concrete seawalls according to research from sustainable finance firm Earth Security.
The firm said insurers and reinsurers have paid more than $300bn for coastal storm damages in the last decade and this is expected to increase by 10 times in the next decade as climate change proliferates. It has launched a report ‘Insurance Underwriting with Nature: How Mangroves Can Transform the Climate Strategy of Companies, Cities and Re/insurers’, that focuses on incorporating the economic value of coastal mangrove forests as natural storm barriers.
Considering mangroves for pricing
The report said recognising and pricing the value that mangroves provide in damage limitation would give (re)insurers a competitive advantage by offering better-priced policies. It could also help provide cover for physical assets that would otherwise be considered uninsurable.
According to the report, coastal ecosystems have been found to reduce annual damages to property from extreme weather in the Philippines by 30%, saving up to $1bn each year. After strong typhoons hit the Philippines repeatedly, communities and infrastructure surrounded by mangroves have sustained fewer losses than neighbouring areas where mangroves had been cleared.
Earth Security CEO Alejandro Litovsky said, “Insurers have shared that this would allow them to look at areas that they previously thought were uninsurable. I think that changes the landscape of how the sector can think about market development in a way. Twenty to 30 years from now, we’re going into a scenario where many areas that are insured will most likely be uninsurable. Mangroves are providing that extended shelf life of insurability. I think there is a possibility of lower premiums.”
Earth Security believes the (re) insurance sector could lead climate innovation by including the value of mangrove forests into CAT modelling and the development products for corporate and government clients. PIRA has convened a working group with Earth Security to collaborate on pilot projects based on the findings of the report.
“There are a lot of mangroves in the Philippines. We’re in the epicentre of typhoons. Most built assets in the Philippines are coastal or found near the coasts given the archipelagic nature of our country. So, a study that then demonstrates the productive value of mangroves, coastal assets against storm surges waves, will be a valuable tool in both risk assessment and loss mitigation ... But underwriters are a cynical lot and my job is to get them to understand the value of that relationship,” said PIRA executive director Michael Rellosa.
Insurers will also need to persuade global reinsurers and brokers to understand the value of mangroves. However, Mr Rellosa believes persuading underwriters will be easier as the Insurance Commission has expressed interest to provide incentives for insurers working on projects to utilise the value of mangroves.
“I think the devil is in the details. You have a report that shows the value of things but turning that into something concrete is another story. So, we must plan carefully and see how we can go forward. Most importantly, we have the regulators on board,” he said.
“We have had several meetings on potential or possible incentives that can be granted to regulated entities for mangrove insurance. We support future moves to have tax incentives on this. A tax exemption or tax incentive is a matter that is not within the ambit of the Insurance Commission. However, the Insurance Commission will support PIRA, if requested, in any technical working group moving forward,” said Insurance Commission deputy commissioner Erickson Balmes, speaking at a roundtable discussing the findings of the mangrove report.
Improving CAT models
The report said proprietary CAT models do not specify climate change scenarios and are based on past data. According to the report, this makes the issue of climate change and weather system disruption a critical challenge for modelers and the (re) insurance companies they serve.
“The proprietary models that are used to underwrite are not produced by the insurers themselves and they’re pretty much black boxes. What we thought would happen once in 100 years are happening many times in one year and that really is shaking everyone up ... On a positive note, models are starting to emerge that are linking up natural assets with catastrophe modelling and the range of discussions we’ve had with scientists that say this can be done. It’s just that the insurance sector hasn’t seen it yet. And so, there’s a need to connect these dots,” said Mr Litovsky.
However, there is an open-source CAT modelling platform that is widely used in the Philippines that allows for adjustments, the inclusion of new datasets, as well as climate change and ecosystem- related information. The platform is currently undergoing beta testing.
Insuring the mangroves
Philippine insurers also discussed the possibility of developing insurance products to cover the mangroves. Such products could support post- event reconstruction in the aftermath of typhoons, especially in cities and locations that are dependant on mangroves for protection.
“When cyclones hit and mangroves get destroyed, there’s usually a financing gap to deploy money to rebuild, to replant, to restore and this is another opportunity to create a product that will help these locations trigger funding for reconstruction.
“This can be done in a variety of ways such as parametric insurance products. We believe there’s a range of ways to create streams that will pay for premiums. That is something that needs to be explored in more detail with specific companies that will be interested in in venturing into that space,” said Mr Litovsky.
Find the report, Insurance Underwriting with Nature, here
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