Quintana Roo Reef Protection (Parametric Insurance)

Summary

Developed and launched in 2018 by Swiss Re and The Nature Conservancy, the Quintana Roo Reef Protection policy is a parametric insurance policy originally designed to protect 100 miles of the Yucatan Coastline in Mexico. In contrast to traditional indemnity insurance products, parametric insurance is a pre-agreed contract where claim payments are triggered immediately once the event meets certain thresholds. In the Quintana Roo case, the claim payment is triggered when hurricane wind speeds reach a pre-agreed level, allowing the policy holder to receive funds to help repair the area’s coral reef quickly. The Coastal Management Zone Trust purchased the policy using fees from the tourism industry and coastal property owners, in addition to some government funding.  The policy helps to maintain the reef and, by extension, the financial security of the community that relies on it.

Background

As greenhouse gas emissions rise, severe weather events increase in both severity and frequency. The number of weather-related disasters globally have increased by five times between 1970 and 2021. On average, each of these disasters killed 115 people and caused USD 202 million in damages [1]. Climate adaptation is therefore needed to make communities and ecosystems more resilient.

In 2018, Swiss Re launched the first parametric insurance model to help maintain the health of Mexico’s Quintana Roo reef and, by extension, the financial security of the community that relies on it.

The insurance claim payment is triggered when hurricane wind speed reaches pre-agreed levels in a pre-defined area. The fast release of funds allows the policy holder to rapidly deploy resources to support recovery of the reef, which minimises economic damage and further ecological degradation. This index-based cover avoids the longer wait times that are typical of traditional indemnity insurance, which requires verification of losses before claims can be made.

Importance of the Reef

The original policy covered roughly 100 miles of coastline, including several Mexican municipalities and their towns – such as Cancún, Puerto Morelos and Playa del Carmen. The reef forms part of the larger Mesoamerican Barrier Reef, which stretches nearly 700 miles across several countries in the Caribbean and is the second largest barrier reef in the world.

The reef provides the Quintana Roo area with multiple environmental and socioeconomic benefits. It is fundamental to the area’s tourism industry, which earns at least USD 10 billion every year. The reef also plays a key role in protecting and maintaining the coast. A healthy coral reef can reduce up to 97% of a wave’s energy before it hits the shore [2], mitigating both storm-related damages and daily coastal erosion. However, the reef is increasingly vulnerable to damage. Since 2009, approximately 14% of the world’s coral reefs have been lost [3].

Inception

The project was first conceived by The Nature Conservancy (TNC) in 2016, which completed an economic risk analysis, finding that storm damages to buildings along the coastline could triple with the loss of the reef [4]. As a result, TNC decided to explore ways seeking to insure the reef based on its economic value to the region.

Cherie Gray, Global Lead for Sustainability & Market Development, says that Swiss Re was invited by TNC to help develop this innovative solution due to its experience in comprehensive disaster risk financing and insurance strategies, particularly regarding index-based (parametric) insurance.

Cherie Gray, Global Lead for Sustainability & Market Development, Swiss Re

Policy Structure

There were several stakeholders involved in the initial parametric insurance structure and deployment:

Coastal property owners were first engaged by TNC in 2016 via the Cancun and Puerto Morelos Hotels’ Association. Gray says the influence and aggregation benefits of the Association were key for engaging with the local stakeholders.

The property owners contribute fees for the use of coastal areas via an existing beach lease structure on an annual basis. These federal fees are collected by the respective municipal governments, and a portion is passed on to the Coastal Management Zone Trust (CMZT), a Trust created by the State Government of Quintana Roo in 2018. In addition to the property owner fees, the CMZT receives government and philanthropic grants to fund reef protection activities. It is governed by a technical committee formed of government officials, scientific experts, NGOs, hotel association representatives and TNC. The Trust is responsible for how funds are best spent to protect the reef and beaches of Quintana Roo. Gray comments:

“Working with the government parties allowed the model to leverage the existing financial structure. However, the creation of the Trust ensures both public and private sector interests are maintained.”

The CMZT has contractual obligations with two entities that support the reef’s protection:

The first is with the insurance company, which provides the parametric insurance policy. The policy is triggered when winds reach a minimum of knots within the insured area, and payments vary according to wind strength. The funds are paid often within a few weeks, which enables reef and beach restoration work to be undertaken quickly. This minimises both the damage to the reef’s coral structure and the disruption that the hotels face from the beach debris.

The second is the reef restoration team, known as the ‘Brigade’ that is made up of divers, tour guides, fishermen, marine biologists and other scientists, mostly on a volunteer basis. When the policy is triggered, the CMZT sends the Brigade out to assess and restore the reef. Restoration activities include reattaching pieces of broken coral to their original structures, collecting fragments to seed new colonies, and clearing debris from beaches. Below is the structure of the model:

Source: T.Zoltani (2017) Trust Fund and Insurance Mechanism

Outcomes

The policy was notably triggered in 2020 when Hurricane Delta hit the covered area as a Category 3 storm. A USD 800,000 payment was made, which enabled roughly 80 Brigade members in the Puerto Morelos National Park to act on the damage within a week. The team stabilised 1,200 large coral colonies that had been displaced and transplanted 9,000 broken coral fragments. Smaller scale recovery efforts also took place in Cancun, Nizuc and Isla Mujeres Reef National Park. Personal accounts from Brigade members during this time can be read here.

Challenges

The model has successfully scaled and replicated across different ecosystems and geographies.

In 2020, the Mesoamerican Reef Fund, which targets restoration work across the entire Mesoamerican Reef (MAR) in the Caribbean Sea, developed the Mesoamerican Reef Insurance Programme, working with Willis Towers Watson, InsuResilience Fund (ISF) and AXA Climate [5]. As of 2023, the programme covers 11 reef sites across the MAR region and the premium is supported with funds from ISF and UNDP (through the AF-EU-UNDP Innovation Small Grant Aggregator Platform (ISGAP)) [6].

In 2022, TNC in collaboration with Willis Tower Watson (WTW) launched the first coral reef insurance policy in the United States in Hawai’i. TNC selected Munich Re to provide the coverage. The policy is funded by the Howden Foundation, Bank of America Charitable Foundation and private donors. TNC is the policy holder and is responsible for disbursing the funds to its partners. As Hawai’i is disproportionally impacted by tropical storms, the model was adapted to include tropical storms in addition to hurricanes. In 2024 TNC expanded the model to provide protection and coverage across the eight Main Hawaiian Islands. The modified policy now adds 314,976 km² to the coverage area and the minimum payout has increased to USD 200,000 [7].

The model has also been tested and replicated across different ecosystems such as protecting wetlands from typhoon and drought risks. Swiss Re has also worked with China Pacific Insurance Company to protect the Gross Ecosystem Product GEP value of the National Wetland Park (Hangzhou Bay). The price of the insurance policy is based on the GEP value, measured by carbon sequestration and wetland maintenance and restoration costs [8].

Updated as of October 2024

Sources:

1. World Meteorological Organisation (2021) Weather-related disasters increase over past 50 years, causing more damage but fewer deaths
2. Ferrario et. al (2014) The effectiveness of coral reefs for coastal hazard risk reduction and adaptation
3. Global Coral Reef Monitoring Network (2020) Status of Coral Reefs of the World: 2020
4. The Nature Conservancy (2024) Insuring Nature to ensure a resilient future: coastal zone management trust
5. Marfund (2021) Innovative post-hurricane protection for endangered Mesoamerican Coral Reef goes live with insurance carrier confirmed
6. Willis Towers Watson (2023) WTW announces third renewal and expansion of coral reef insurance programme
7. The Nature Conservancy (2024) Major Upgrade to First U.S. Coral Reef Insurance Policy Increases Coverage and Enables More Robust Post-Storm Response
8. Swiss Re (2024) Insurance to protect and enable nature-based solutions
9. Interview with Cherie Gray, Global Lead for Sustainability and Market Development, Swiss Re