In 2019, the Quintana Roo Government purchased a first-of-its-kind insurance policy to cover 160 kilometres of coastline in the Yucatan Peninsula of Mexico. The area includes part of the Mesoamerican Reef, home to more than 60 types of hard corals that form a habitat for over 500 fish species and the world’s largest congregations of whale sharks.

In 2020, when the devastating category two Hurricane Delta hit the coastline, the investment paid off. The resulting pay-out of nearly USD 800,000 was used to offset the costs of repairing the insured reefs and beaches.

The funds for the insurance policy came from the Coastal Zone Management Trust, which was established a year prior by the Government of Quintana Roo with support from The Nature Conservancy and partners.

But is this the best way to protect our oceans’ precious coral reefs?

With rising temperatures, more frequent and severe storms, “blue” natural resources like mangroves and coral reefs are increasingly in danger. Coral reefs protect coastal areas from storms and wave erosion, generate economic activity, and house diverse marine habitats, making them critical both to life on land and under the sea. However, over half of coral reefs have already been lost and what remains of them is at risk of rapid extinction.

Rather than protecting these resources from storms and other effects of climate change from the outset, an insurance policy means help after disaster strikes. Until climate change is tackled and its effects on our oceans mitigated, this may be the only choice.

The provision of insurance provides fast cash in the aftermath of a disaster, enabling trained community members and experts to address reef damage following a severe storm and accelerating recovery. An injection of cash through insurance is also critical to mitigating the damage to local and national economies, which are often dependant on the reef for economic activities (in Quintana Roo, these largely comprise of tourism).

The applicability of such an insurance product has the potential to expand well beyond coral reefs to other types of blue natural capital and sources of carbon sequestration, such as mangrove restoration.

However, unsurprisingly, Quintana Roo has been the only major success story to date. “There are a number of lingering questions,” notes one of Palladium’s ocean advocates, Grace Lucas. “It’s difficult to establish property ownership – and thus, financial and environmental responsibility – in coastal ecosystems.”

According to Lucas, multiple stakeholders need to unify so that they are both responsible for and benefit from ocean ecosystems. “Coral reefs and other blue natural capital don’t adhere to borders and may be distributed across several areas. Bringing multiple stakeholders together to agree on an opt-in structure can be difficult under the best of circumstances.”

Lucas notes that in addition, approaches must be customised to fit local contexts “Any insurance mechanism will need to be designed with the local community and economy in mind to make sure it’s viable.”

The fact that both the Government of Quintana Roo and the Coastal Zone Management Trust understood the critical connection between the natural world and the livelihood of its citizens was an important step in moving towards more and better protective policies for lasting change in the blue economy.

And more successful insurance policies may be coming in the near future. In partnership with the Ocean Risk and Resilience Action Alliance (ORRAA), Palladium is working to develop a new global ocean finance ecosystem, the Sea Change Impact Financing Facility (SCIFF). “One of the three key components of this financing vehicle is the Risk Reduction Mechanism, which will develop and deploy insurance products and guarantees to hedge against risk in the blue economy for asset owners, project developers and commercial investors,” explains Lucas.

“ORRAA has brought together a group of insurance experts and practitioners, such as AXA XL and WTW, with whom we are working closely together with to develop an approach to blue coastal resilience insurance that is replicable and scalable.”

Palladium’s partnership with ORRAA and other initiatives in the blue economy to provide avenues for investors to support the oceans’ natural resources and climate-resistant technologies will be critical in fighting the interconnected problems of climate change.

For more information, contact info@thepalladiumgroup.com.