Nature Conservancy, 2 Collaborators Issue Issues Report Entitled 'Reducing Caribbean Risk – Opportunities for Cost-Effective Mangrove Restoration and Insurance'(Part 3 of 4)

WASHINGTON, April 17 (TNSrep) -- Three organizations issued a 34-page report in April 2023 entitled "Reducing Caribbean Risk: Opportunities for Cost-Effective Mangrove Restoration and Insurance." The three organizations were the Nature Conservancy, University of California Santa Cruz and AXA.

Here are excerpts:

(Continued from Part 2 of 4)

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Insurance Product Analysis

Some market analysis will need to be location specific but for this review, we focus on seven countries (the Bahamas, Belize, Cuba, the Dominican Republic, Jamaica, Mexico, and the United States) with some of the greatest opportunities for mangrove insurance in terms of benefit to cost ratios for restoration and market forces. These seven countries include three of the countries with the highest number of cost-effective opportunities, based on 20 km study units, for mangrove restoration (Cuba, the Bahamas, and the United States). The four additional countries included (Belize, the Dominican Republic, Jamaica, and Mexico) also have numerous cost-effective opportunities for mangrove restoration.

For these seven countries we consider relevant country-level demand-side factors. This initial high-level analysis will rule out countries that do not currently possess the right customer base, adequate governance or economic infrastructure to support a mangrove insurance product. For each country, we assess three specific factors: (i) governance indicators, (ii) current size of the insurance market, and (iii) macroeconomic indicators. The governance indicators will tell us how likely a mangrove insurance product is to succeed given a country's current political state, including the regulatory environment and level of corruption. The insurance market information will tell us how widespread insurance currently is in the country and will give us a sense of the likelihood of adoption of a mangrove insurance policy. Finally, the macroeconomic indicators will give us a sense of the level of funds available to support a mangrove insurance policy in a given country. In addition, we can use the macroeconomic indicators to get an initial sense of the potential customers for a mangrove insurance policy.

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Table 1: Country-Level Governance Indicators (2018). Note: Scores range from -2.5 (weak) to +2.5 (strong). Source: The World Bank, "World Governance Index," available at http://info.worldbank.org/ governance/wgi/#home.

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Table 1 displays five governance indicators for each of the seven countries. For each indicator, the table shows the country's raw score as well as its percentile rank across all 214 countries analyzed. The scores range from -2.5 to +2.5 with higher scores indicating stronger governance for that particular dimension. We've also included the average score across these five dimensions for each country. The Bahamas, Jamaica, and the United States are the only three countries to have an average score above zero although Mexico also scores fairly high in regulatory quality.

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Table 2: Country-Level Insurance Market Indicators (2017). Note: Data not available for Belize or Cuba. Source: Swiss Re Institute, "World Insurance: The Great Pivot East Continues," 2019, available at: https://www.swissre.com/dam/jcr:b8010432-3697-4a97-ad8b-6cb6c0aece33/sigma3_2019_en.pdf.

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Next, Table 2 shows the insurance market premium volume for five of the seven countries - insurance market data were not available for Belize or Cuba. For this dimension, we only consider non-life insurance premiums as mangrove insurance would not fall into any life insurance policy. In terms of non-life premium volume per capita, the Bahamas and the United States have significantly bigger insurance markets than the Dominican Republic, Jamaica, and Mexico, and both countries exceed the penetration rate of non-life insurance globally - measured as the non-life insurance premium volume as a percent of GDP. In comparison, Jamaica's insurance market is much closer to global penetration rates and Mexico's and the Dominican Republic's insurance market are smaller than global penetration rates. On the other hand, the penetration rate for insurance in the Bahamas is mainly driven by the small fraction of the population that is wealthy. The size of the market in terms of total premiums is largest in Mexico and the United States.

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Table 3: Country-Level Macroeconomic Indicators (2015). Note: Caribbean Small States include Antigua and Barbuda; The Bahamas; Barbados; Belize; Dominica; Grenada; Guyana; Jamaica; St. Kitts and Nevis; St. Lucia; St. Vincent and the Grenadines; Suriname; and Trinidad and Tobago. Source: The World Bank, "World Development Indicators", available at: https://databank.worldbank.org/reports.aspx?source=world-development-indicators.

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Finally, Table 3 shows key macroeconomic indicators for each country. For comparison purposes, we include the same indicators for a set of 13 Caribbean small states and for the World. This table provides us with three key takeaways. First, six of the seven countries (except Belize) receive over one million tourists a year suggesting that mangrove insurance tied to the tourism sector may be especially effective. Second, all of the countries except Cuba have fisheries production that is composed almost exclusively of capture fisheries--or the harvesting of naturally-occurring freshwater and marine living species--in comparison to a world average of slightly less than half. This observation suggests that given the strong reliance on marine ecosystems for fisheries production, there may be strong interest in protecting coastal ecosystems in these countries. Third, the Bahamas, Mexico, and the United States have the highest GPD per capita of all seven countries, with the Bahamas' GPD per capita being over three times that of Mexico, and the United States' GPD per capita being over five times that of Mexico, suggesting that capacity to pay for mangrove insurance may be highest in these three countries.

As an additional check on each country's potential interest in supporting a mangrove insurance product, we cross-check which of these countries are members of the Caribbean's Catastrophe Risk Insurance Facility (CCRIF). CCRIF was created in 2007 and operates as a regional parametric insurance product to limit the financial impacts to an individual country related to hurricanes, earthquakes, excessive rainfall or other catastrophic events./4 Since 2007, CCRIF has made 41 payouts to 13 different member countries totaling over $152 million USD. Countries that are currently members of the CCRIF may be more likely to have a national government that would support the development and piloting of a mangrove insurance product. Of the seven countries assessed here, three are currently members of the CCRIF - the Bahamas, Belize, and Jamaica.

4. For more information, see https://www.ccrif.org/.

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Table 4: provides a summary of each of these demand-side factors for all seven countries.

Table 4: Summary of Country-Level Demand-Side Factors.

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Implications and Recommendations

For the first time, we have created a spatially explicit benefit-cost analysis across an entire region to identify where mangrove restoration may be most cost effective for conservation and restoration. This work builds on the paper recently published by Menendez et al. (2020) by adding information on restoration project cost and considering restored mangroves as 30-year assets.

The results identify that there are many opportunities for mangrove restoration across the Caribbean. There are 20 states, territories and countries in the region that have sections of coastline (i.e., measured in 20 km coastal study units) where the benefit-cost ratio of mangrove restoration exceeds one. In total, we identified more than 165 coastal units (i.e., more than 3,000 km of Caribbean coastline) where the benefits of mangrove restoration, in the form of coastal protection, exceed the costs of mangrove restoration using a 7% discount rate. When we use a 4% discount rate, there are an additional 15 study units (an additional 300 km of coastline) with cost effective opportunities for restoration.

Mangrove restoration in some areas may be more expensive than we estimate. In our analysis, however, there are many areas where the benefit to cost ratios exceed 2, 3 and even 10 times mangrove restoration costs. This high benefit-cost ratio means that even if restoration was twice as expensive, there would still be many coastal areas across the Caribbean where it is economical to restore and protect mangroves. Further, we expect that as mangrove restoration efforts grow across the Caribbean, restoration costs should reduce. That is, we expect economies of scale as the number and size of projects grow. This expectation is based on experiences elsewhere including in Southeast Asia where there are many large mangrove restoration projects with costs that are about an order of magnitude less than in the Caribbean.

The development of a mangrove insurance product would be a unique tool to protect mangrove forests and to ensure that they continue to provide coastal protection benefits. Although mangrove forests face many natural and man-made threats, it is most feasible that a mangrove insurance product would enable mangrove repair post storm. We note, however, that there are other potential opportunities for a mangrove insurance product related to, for example, carbon sequestration.

The most likely mangrove insurance product would be a parametric insurance product but there is also an opportunity to develop an indemnity product and/or some combination of parametric and indemnity insurance. Parametric insurance is unique in that it allows for the rapid disbursal of funds following the trigger event which, subsequently, would allow for the rapid repair of mangrove forests. Indemnity insurance could be implemented if there were aspects of the mangrove forest that do not require immediate repair. In the case of parametric insurance, wind speed remains the most likely triggering event but other triggering events, such as storm surge and precipitation could also be considered.

There is potential for any mangrove insurance product to be marketed to either private or public customers. In the short-term, however, a mangrove insurance product geared towards the public sector appears most feasible. With a mangrove insurance policy, local or national governments could use the insurance coverage to restore damaged mangrove forests with the aim of protecting communities and assets from storms, which could impact local food sources, local infrastructure, and local economies. A mangrove insurance policy designed for private customers is also possible but would require overcoming the collective action problem - whereby a single mangrove forest may protect multiple households and/or businesses. In addition, commercial modeling capabilities are currently not able to assess the protective benefits of mangrove forests at the granularity that would be needed for a private insurance product on smaller properties. In the short-term, the private sector can continue to demonstrate the protective value of mangrove forests for their properties to the point that insurance companies begin to encourage policyholders to invest in mangroves. Over time, these investments in mangrove forests could be compensated with a reduction in the cost of property insurance.

Finally, for seven of the countries with the largest amounts of mangrove coastline that would be cost-effective to restore, we consider whether these countries have sufficient market and economic conditions to support a mangrove insurance product. We note that the targeted mangrove insurance customer in any given area would differ based on who receives the most protective benefits; that is, whether it is residential, commercial, or public sector assets that are protected by the mangrove forest to a greater extent. We find that while the Bahamas and the United States have the strongest governance metrics and most robust insurance markets of all seven countries reviewed, other countries also show strong potential. For example, Jamaica has one of the highest population densities of all seven countries considered suggesting that mangrove insurance targeted to the public sector may be especially valuable there.

Before developing and piloting an actual mangrove insurance product, more assessment and analysis is required. Quantitative analyses will be needed to construct fragility curves and to understand the wind reduction benefits provided by mangroves; the analysis here only considers the flood reduction benefits of mangrove forests. The addition of wind protection benefits from storms will increase the value ($) of benefits and make restoration projects even more cost effective (i.e., higher B:C ratios). Fragility curves identify under what storm conditions mangroves are destroyed and/or fail during storm events. The construction of a fragility curve is essential for identifying (i) the storm conditions under which mangroves stop providing protection benefits, and (ii) the storm conditions under which payouts will be required to restore mangroves post-storm. Finally, additional ecosystem services could be included in the benefit assessment, such as recreation, erosion reduction, fish production, or carbon sequestration, which would only further the case for mangrove restoration and protection.

In addition, for any specific geographic location identified, a market analysis will be required in order to identify the appropriate mangrove insurance customer, assess their interest in purchasing such a product, and how best to structure a mangrove insurance product for this customer. The buyers and sellers of a mangrove insurance product may also be interested in much higher resolution flood models so that they can better define the benefits of local mangrove forests. Beginning the work on these next steps is paramount, given the large number of cost-effective mangrove restoration projects that currently exist in the Caribbean region.

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(Continues with Part 4 of 4)

The report is posted at: https://www.nature.org/content/dam/tnc/nature/en/documents/TNC_MangroveInsurance_Final.pdf

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