As the specialty (re)insurance market continues to consider the impact of Covid-19 on its books, it can be tempting to push more systemic risks to the back of the to-do pile.
But biodiversity, the sustainability of ecosystems and the preservation of ocean resources remain some of the most important topics for many corporations and, importantly for insurers and brokers, are creating one of the must-watch sectors for future coverage needs.
"Ocean risks is one of the fastest growing sectors in insurance, especially for marine specialists. We see it as an exciting new avenue, not only as a relatively young risk profile with the evolution of ocean industries from traditional shipping and energy, but also because of the added focus on sustainability and combating climate change," says Skuld’s CEO Ståle Hansen.
Often described as the ‘blue economy’ or ‘ocean risks’, this collective of insurable assets and liabilities is a somewhat disparate bunch, spreading across a number of lines of business.
According to the World Bank, the blue economy is the "sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem".
The European Commission defines it as: "All economic activities related to oceans, seas and coasts. It covers a wide range of interlinked established and emerging sectors."
And the Commonwealth of Nations considers it "an emerging concept which encourages better stewardship of our ocean or 'blue' resources".
A report from XL Catlin (now Axa XL) in 2018 said the rise of the blue economy was being driven by rapid growth of marine transport and tourism, industrial use of coastal and seashore areas and extraction of resources from the ocean and marine environments.
In 2010, the size of the worldwide blue economy hit $1.5tn in value added, or approximately 2.5% of world gross value added (GVA). With a gross marine product of at least $24tn, the blue economy in 2018 ranked as the world’s seventh biggest economy.
The blue economy’s projected growth rate of around 5% per annum could double its GVA by 2030. XL Catlin argued that since insurance penetration covered only minor parts of this blue economy, it presented a significant business opportunity for the insurance industry.
More recently, Swiss Re's September 2020 Biodiversity and Ecosystems Services Index estimated 55% of global GDP is dependent on intact ecosystems. However most of these natural assets and eco-services are not insured.
“There is opportunity for this risk pool to grow significantly as we redirect investment into our natural assets and more sustainable infrastructure. The blue carbon industry is also still in development, but will grow as organisations and countries progress towards our NetZero targets,” a Swiss Re spokesman says.
Axa XL used its earlier report to argue that the insurance industry’s ability to continue with ‘business-as-usual’ when it comes to ocean risk could become questionable as increases in atmospheric greenhouse gas concentrations continue to affect the ocean.
“Observed and future changes within the ocean and marine ecosystems have the potential to significantly affect the insurance industry in a number of ways, from the value of insurance companies’ assets to the loss potential across various lines of insurance business,” it says.
It’s not all doom and gloom however. As with any emerging risk, the changes bring opportunities as well as challenges. The transfer of ocean risk has the potential to increase in size and relative importance for the insurance industry as the growing blue economy needs risk transfer for its investments.
Swiss Re has been active in this space for a number of years. In 2017, it launched a solution to protect the Mesoamerican coral reef, and the associated tourism revenue, from storm damage. The product ensured that after a storm, funds are quickly disbursed, enabling community members to rapidly start restoration actions and minimise coral damage.
This was recently proven during Hurricane Delta, when it hit the Mexican state of Quintana Roo in October and triggered a payout that enabled the stabilisation of uprooted coral colonies, and the collection and replanting of broken coral fragments, many of which will now grow as new coral colonies – all in the eight days immediately following the disaster.
And in 2019, Swiss Re provided construction risk cover to move 5 million cubic metres of sand around the island of Texel in the Netherlands to create a new coastline and mitigate erosion risk.
The project not only protected the tourism revenue of this World Heritage Site, but also delivered additional benefits of enhanced fish production, climate regulation, and water quality regulation.
Jacqueline Wharton, associate director of the climate and resilience hub at Willis Towers Watson has also noticed a rise in opportunities from governments and development agencies.
“Climate risk [might seem] really far off, but it needs to be [considered] at the ground level,” she says.
“A lot of mega cities are placed right on the coast, so there’s a lot of thought about what that actually means [in terms of risk] – development agencies are helping developers plan their blue economy development plans.”
One of the other major considerations is how changing attitudes to climate risk may impact aviation transport demand, and see an uptick in marine transportation instead, she continues.
But many of Wharton’s markets are small. Microinsurance needs, in agriculture, fisheries, coastal erosion, coral reef protection etc, and parametrics have been playing an important role.
“I see a lot of potential for innovation around ocean risks in particular because with these risks, what you're looking for is not necessarily to indemnify a loss, but to recognise that if a certain event happens, you're going to need X amount more money,” she says.
“There could be payouts to basically realign your planning so that you have money available to change your infrastructure.
“I haven't seen examples of any covers like this, but you could basically plan trigger payouts associated with certain sea level rise scenarios or different inundation experiences. One of the really cool ones we're working on is coral reef covers associated with marine heat waves. They’re so directly linked to emissions scenarios, and emissions pathways aren't really insurable like a cyclone at the moment.
“But you could, you know, insure a reef for a coral bleaching event that would then say provide payouts to fishing companies in that area for a certain amount of time to allow it to recover. That's something that governments are looking into at the moment.”
For those interested in learning more about this risk, one of the major initiatives that the (re)insurance industry is involved in is the Ocean Risk and Resilience Action Alliance (ORRAA).
ORRAA launched its 'Ocean Resilience Innovation Challenge' to accelerate the development of innovative and scalable finance and insurance products that drive investment in coastal natural capital and increase resilience while delivering a return on investment.
Swiss Re is one of the companies getting involved as a mentor this program in 2021. A spokesman says: “At Swiss Re, we believe that nature is an asset that should be protected and invested in, the same way we protect and insure other property assets and our health.
“The health of our coastlines and oceans plays an important part in mitigating damage from weather events and tidal surge, storing blue carbon and supporting many economies, from aquaculture to transport and tourism.”
