Biodiversity markets will have a hard time establishing and attracting financing on a large scale unless insurers step in for nature, experts have told Carbon Pulse.

With nature restoration becoming an international priority under global and national targets, new mechanisms such as biodiversity credits are emerging to channel funds towards nature positive activities.

However, due to the dynamic nature of ecosystems and the relatively limited knowledge about how to measure biodiversity, nature markets still face a certain amount of reluctance.

In light of that, the need to de-risk financing opportunities through a specially designed insurance product is becoming key.

“If there’s no insurance, it’s hard to get financing, especially because we have a lot of gaps in risk data for nature,” Raviv Turner, co-founder at the Nature Tech Collective and managing partner at NatureX Venture Studio, told Carbon Pulse.

“If we better understand the risk, we can start insuring natural assets. And that’s a pretty innovative concept: what if we can ensure the forest, cropland, or reefs to bring financing to nature-based solutions?”

INSURING NATURE

Currently, NatureX Venture Studio is piloting two separate initiatives: a parametric instrument for regenerative agriculture transition and a wildfire insurance in the Amazon with premiums contingent on ecological forestry practices to reduce wildfire risk.

In the first case, the insurance will provide financial safety to the farmers in the US who move from unsustainable industrial agriculture to regenerative practices.

“If we can offer insurance for nature-based solutions and initiatives such as regenerative agriculture, it means that we’re going to see more action, more private capital, and more investors willing to support biodiversity-focused projects,” Turner said.

The NatureX Venture Studio is also working on building the world’s first parametric insurance platform for natural assets.

Parametric instruments, also known as index-based, are insurances that cover the probability of a loss-causing event happening – such as earthquakes, tropical cyclones, or floods – instead of indemnifying the actual loss incurred from the event.

One of the most significant experiments in such products was implemented in Mexico a few years ago, when the Quintana Roo government purchased a first-of-its-kind mechanism to insure the Mesoamerican Barrier Reef in partnership with a number of private and international stakeholders, including Swiss Re and The Nature Conservancy.

The parametric insurance was designed to provide compensation when wind speeds exceed 100 knots, with the maximum compensation of $3.8 million paid out when wind speed exceeds 160 knots.

When Hurricane Delta hit the coastline of Quintana Roo in 2020, the event led to the world’s first-ever coral reef insurance payout, totalling $850,000, which was used to restore the reef.

“When it comes to ecosystems such as reefs, it is crucial to have access to immediate funding,” Turner said. “Otherwise, it’s much harder to restore it.”

UNDERSTAND THE RISK

To unlock nature insurance uptake, collecting risk data on natural assets is a crucial step.

According to Jaroslav Mysiak, project coordinator at the EU-backed Naturance initiative, it is essential to involve insurance companies in the process, as they have the risk science that is needed.

Naturance, led by the Euro-Mediterranean Center on Climate Change and funded by the EU’s Horizon Europe, aims to investigate the role of insurance in scaling up nature-based solutions.

“For insurers, risk is their business,” he told Carbon Pulse. “They know how to quantify it, and translate this knowledge into actionable commitments.”

Mysiak said insurance companies must also understand the need to invest themselves in nature-based solutions, including biodiversity credit-related projects.

“Insurance companies manage large funds, and they could become big players in financing nature-related projects,” Mysiak said.

“You might introduce a change into the financial system starting from those who are managing the funds.”

Insurance companies are also directly affected by biodiversity loss, as the nature crisis is undermining their business models. In some parts of the world, the nexus is becoming more and more evident.

“In California and Colorado, for example, where wildfires are a huge problem, insurance companies don’t want to insure real estate properties anymore,” Turner said.

“They need to find ways to mitigate those nature-related risks and offer insurance products to the people, while understanding they have to invest in nature-based solutions if they want to operate in specific countries.”

A GROWING COMMITMENT

Nonetheless, the sector’s engagement is still in its early stages. According to insurance expert Praveen Gupta, former general manager at Bajaj Allianz General Insurance and CEO at Raheja QBE General, the money pipelines are largely ending up at the wrong resources.

“Insurers have all the information, all the data about every risk, whether they can insure it or not, whether they can invest it or not,” he told Carbon Pulse.

“Shouldn’t they be sharing that with the world at large to keep it safe and in good shape? The answer is yes. But are they doing it? The answer is no.”

Speaking to Carbon Pulse, Gupta called on governments and global institutions to take action and incentivise insurance companies to step in.

“The change will come from regulators and the government. If governments insist, then something will happen,” he said.

“This requires global collaboration, as well as engagement of Indigenous peoples and like-minded people.”

For instance, according to Mysiak, European insurers are increasingly recognising that they need to do more for nature, also thanks to pressure from institutions like the European Insurance and Occupational Pensions Authority (EIOPA) and regulations such as the Corporate Sustainability Reporting Directive.

In 2022, EIOPA established a working group to find ways to stimulate investment in adaptation and understand how the insurance industry can contribute more.

Some nature-related initiatives have already emerged in the private sector during the last few months, while others are in the pipeline.

In May, France-based reinsurance company SCOR launched the Restore Product, an insurance instrument to support ecological restoration projects. In June, AXA Climate – a partner of Naturance – and Treemetrics launched an insurance product to address the concerns of forestry owners and investors about natural disasters such as fires and storms.

According to the Nature Tech Collective’s Turner, nature insurance is set to become the next global frontier in the biodiversity space.

“I think it’s even bigger than with climate, because it covers water, soil, biodiversity. It covers so many things other than just carbon,” he said.

“Insurance companies are starting to think about natural assets the way they think about real estate. We need to step in now and seize the moment.”

By Giada Ferraglioni – giada@carbon-pulse.com

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