Proposal for Bren School of Environmental Science & Management Group Project 26 January 2018

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1 Proposal for Bren School of Environmental Science & Management Group Project 26 January 2018 Project Title: Guiding insurance instruments to leverage natural infrastructure for climate change resilience I. Student Proposer(s) Seleni Cruz Latin American Fisheries Fellow Master s Candidate, 2019 scruz@bren.ucsb.edu Mario Colon Master s Candidate, 2019 mcolon@bren.ucsb.edu II. Clients Justus Raepple New Product Development, NatureVest The Nature Conservancy justus.raepple@tnc.org Mike Beck Lead Marine Scientist, Office of Chief Scientist The Nature Conservancy mbeck@tnc.org III. Objective The objective of the project is to develop an insurance instrument that promotes habitat restoration through leveraging natural infrastructure for climate change resilience while quantifying co-benefits. Specifically, this project will focus on the hotel insurance landscape within the United States and the Caribbean that benefit from high tourism (e.g. Florida and Belize) with an aim of understanding how natural infrastructure, such as coral reefs and mangroves, can be incorporated into currently-available insurance mechanisms. Ultimately, the project will inform the feasibility of a holistic blended risk transfer/risk reduction insurance product by completing the following objectives: (1) Conduct interviews (2-5) with key insurance players to develop a landscape assessment of current insurance mechanisms; (2) Identify, articulate, and quantify the co-benefits associated with different natural infrastructure coastal resiliency measures, and (3) Produce an insurance product design recommendation that includes the values of the co-benefits along with traditional risk transfers to create a holistic blended value proposition. IV. Significance About 40% of the world s populations lives in coastal areas within 100 km of the coast. 1 As such storms, flooding, and sea level rise pose major threats to coastal development around the globe. With climate change increasing the frequency and magnitude of such events, being able to safeguard coastal communities and property from future risk is important. 2 Mitigating coastal infrastructure loss with investment from insurance capital will be inherently beneficial to insurance companies and property holders/hoteliers and adjacent communities. However, current insurance mechanisms are likely to become more expensive as evidenced by the impending 10 to 40 percent increase in insurance premiums for Caribbean hoteliers following two Category 5 hurricanes, which struck the region in September Compelling evidence indicates that natural ecosystems, such as coral reefs and mangroves, can provide significant flood risk reduction benefits while being cost-effective. Since natural infrastructure resiliency measures are not recognized under current insurance models, there is a lack of incentive to mitigate for risks using such measures. 3 This creates an either/or scenario between the implementation of risk reduction measures ( resilience ) and the purchase of insurance instruments ( risk transfer ), a dynamic that is portrayed in Supporting Materials (Figure I). 1

2 V. Background Over the past decade, The Nature Conservancy (TNC) and its research partners at the University of California Santa Cruz (UCSC) and the University of Cantabria (UC) have calculated the wave and flood attenuation provided by natural ecosystems using insurance industry-standard approaches. As a result, TNC is beginning to work together with major industry insurers to create blended risk transfer/resilience insurance instruments where the restoration and maintenance of natural coastal defenses are paid for through the risk reduction effect they provide via a premium-amortization mechanism. Importantly, while the risk reduction benefits of natural ecosystems provide compelling return on investment (ROI) on a 10+ year full-lifecycle, these benefits are unlikely to pay for themselves on a standalone basis over the insurance treaty period (<5 years). Therefore, the ability to articulate the value of associated ecosystem benefits which are to be realized by the insurance buyer forms an important component of the overall resilience insurance sales pitch. It is the evaluation of these co-benefits, and their potential for integration into a resilience insurance instrument, that form the basis of this project proposal. Natural infrastructure resiliency measures provide a number of cobenefits, including aiding in tourism associated with intact coral reefs and reducing erosion along beachfront properties by reducing the need to artificially supplement sand. 4 By quantifying the direct benefits as well as the co-benefits associated with natural infrastructure resilience measures, insurance companies can better understand the viability of coupling insurance with different resiliency measures to reduce risk. VI. Available Data TNC has developed working relationships with individuals in the insurance field and is committed to facilitating interviews and information-sharing between stakeholders and students. Publicly-available coastal flood and storm surge risk/historical data maps and models will be consulted from FEMA and other sources. For example: Wave attenuation risk benefit provided by natural ecosystems such as mangroves and corals: TNC/UCSC/IHA Cantabria have deep modeling capabilities, at various resolution, in this space (see supporting material). This aspect is not under the remit of this project proposal. Appropriate modeling methodologies for other co-benefits to be investigated by Bren students. Once identified, TNC staff can provide insight into level of data availability for each model type. VII. Approaches These objectives will be completed through the lens of two case-studies: one US hurricane-prone coastal state, and one Caribbean country (e.g. Florida and Belize) to be selected in conjunction with the student group. TNC, via its NatureVest impact investing division, will then use this product recommendation to help inform and guide its resilience insurance origination efforts. Objective I: Conduct interviews with key players to develop a landscape assessment of current insurance mechanisms. Mapping of the current insurance landscape via interviews with key stakeholder including hoteliers, brokers and insurance agencies (2-5 interviews). Objective II: Identify, articulate and quantify the co-benefits of different natural infrastructure coastal resiliency measures. Identification, via literature review, of major relevant natural ecosystem co-benefits which could affect a coastal hotelier. Evaluation of which of these co-benefits have substantive economic value: o To be completed through the evaluation of adjacent industries that exist within the target geography, to provide a relevant pricing counterpoint. 2

3 o By way of example, the evaluation of coastal flood risk reduction could be completed through an examination of (1) traditional insurance coverages purchased by hoteliers and associated premia paid, and (2) investigation of artificial reef project designers. Alternatively, the co-benefit of beach maintenance/post-disaster restoration could be evaluated through interviews with consultants/restoration firms that conduct such work. Identification of appropriate modeling/methodological processes to appropriately convey associated cobenefit economic value. o Will involve investigating modeling technologies that exist and understanding their ability in accurately representing co-benefit values. Objective III: Produce an insurance product design recommendation that stacks the values of the co-benefits along with traditional risk transfers to create a holistic blended value proposition. Determine the co-benefits that generate substantive value to merit inclusion/optimization within a resilience insurance instrument. Within the context of at least two project site locations (one within US geography, one within a Caribbean country), attempt to quantify the co-benefits associated with a natural coastal infrastructure project, using the methodology outlined in Objective II. This may include a cost-benefit analysis and/or a full-cost financial analysis. VIII. Deliverables In addition to the final report, project poster, and oral presentation required by the Bren School, project deliverables will include: Deliverable I: Presentation on coastal natural infrastructure co-benefits and how they could be modeled/valued as part of a holistic resilience insurance product. Deliverable II: Presentation that executes, in two site locations, co-benefit valuation methodologies articulated in Deliverable I as part of a resilience insurance product recommendation. IX. Internships An internship position will be available working under the direction of Justus Raepple in the San Francisco or Denver office (can be based around student s preference). Funding for the position, while currently unknown, will not impact its availability. X. Supporting Materials a. References and relevant scientific literature Ferrario, F., Beck, M.W., Storlazzi, C.D., Micheli, F., Shepard, C.C., Airoldi, L., (2014) The effectiveness of coral reefs for coastal hazard risk reduction and adaptation. Nature Communications, 5, percent/ 4. Narayan, S. et al. The effectiveness, costs and coastal protection benefits of natural and nature-based defences. Plos One 11 (2016). 5. Beck, M.W., Losada, I.J., Reguero, B.G., Menéndez, P., Burke, L. (2016) Breaking Waves. M. Spalding, R. Brumbaugh, E. Landis (Eds) Atlas of Ocean Wealth, The Nature Conservancy, Arlington, VA. 6. Beck, M. W. et al. The global flood protection savings provided by coral reefs. Nature Communications (In review). 7. CCRIF. Enhancing the climate risk and adaptation fact base for the Caribbean. (Caribbean Catastrophe Risk Insurance Facility, 2010). 8. Ferrario, F., Beck, M.W., Storlazzi, C.D., Micheli, F., Shepard, C.C., Airoldi, L., (2014) The effectiveness of coral reefs for coastal hazard risk reduction and adaptation. Nature Communications, 5,

4 9. Narayan, S. et al. The effectiveness, costs and coastal protection benefits of natural and nature-based defences. Plos One 11 (2016). 10. Sheppard, C., Dixon, D. J., Gourlay, M., Sheppard, A. & Payet, R. Coral mortality increases wave energy reaching shores protected by reef flats in the Seychelles. Estuarine Coastal and Shelf Science 64, (2005). 11. World Bank Managing Coasts with Natural Solutions: Guiding for Measuring and Valuing the Coastal Protection Services of Mangroves and Coral Reefs. M.W. Beck & G-M Lange, (Eds), World Bank, Washington D.C. 12. Quataert, E., Storlazzi, C., van Rooijen, A., Cheriton, O. & van Dongeren, A. The influence of coral reefs and climate change on wave-driven flooding of tropical coastlines. Geophysical Research Letters 42, (2015). 13. Internal document [to be published in H1 2018]: TNC, Munich Re Strengthening resilience in coastal areas: Combining nature-based defenses with disaster-relief insurance. 14. Internal document: APCO Insight on behalf of TNC Qualitative In-Depth Interviews Report: Coastal Erosion in Quintana Roo. b. Budget & Justification It is not anticipated that the proposed project would require additional funding beyond the $1,300 contributed by the Bren School. There is a likelihood that funds will becomes available to fund a summer internship and/or a site visitation. While a site visitation would be a valuable experience for students, it is not necessary to accomplish the aforementioned deliverables. c. Client Letter of Support 4

5 Worldwide Office 4245 North Fairfax Drive, Suite 100 Arlington, VA Tel (703) Fax (703) nature.org January 25, 2018 Attn: Group Project Coordinator Bren School of Environmental Science & Management 2400 Bren Hall UC Santa Barbara, CA Dear members of the Bren School Group Project Committee, We are delighted by the prospect of working together with a group of Bren School students on a project. The Nature Conservancy (TNC) has had a variety of past valuable experiences working with the Bren School on water rights issues, and with this project we hope to expand this relationship to begin encompassing TNC s coastal resiliency strategy. Our Global Oceans team, under the leadership of Dr. Michael Beck, has spent the past decade translating the flood attenuation benefits provided by coastal ecosystems (such as mangroves, corals, and dunes) into the conventional risk models used within the insurance industry. The conclusion of these studies is that -- with the exception of sandbags -- natural ecosystems provide the best potential risk-reduction return of investment, especially when compared to conventional grey coastal riskreduction infrastructure. There is a clear conservation opportunity to be captured by elevating the risk-reduction potential of these coastal ecosystems. Over a 10-year period from , $14 billion of total funds were spent on coastal conservation and green infrastructure. Comparatively, coastal storms during the same period totaled $514 billion, of which $214 billion were insured losses. i If we are able to convert even a small fraction of those losses into funding for natural infrastructure coastal resilience funding, the result would be a tremendous opportunity for conservation. Today, the Global Oceans program is partnering with TNC s impact investment arm, NatureVest, as well as major global re-insurers to create novel insurance solutions that blend risk transfer (conventional insurance) with resilience (measures that provide permanent risk reduction benefits). This is analogous to purchasing home insurance and receiving a free smoke detector. For example, the purchaser of coastal hurricane/typhoon risk insurance would receive mangroves or a coral reef for free. We view coastal hotels, and hotel associations, to be among the most promising potential buyers of such a resilience insurance policy since they represent expensive assets located in areas that are highly susceptible to hurricane and typhoon damage. Hotels are also likely to appreciate the co-benefits of such a resilience insurance solution. A restored coral reef not only reduces risk, but also nourishes the beaches that attract tourists, prevents erosion during storm events, and provides natural touristic value to hotel clients.

Worldwide Office 4245 North Fairfax Drive, Suite 100 Arlington, VA 22203 Tel (703) 841-5300 Fax (703) 555-1111 nature.

6 Worldwide Office 4245 North Fairfax Drive, Suite 100 Arlington, VA Tel (703) Fax (703) nature.org We view the stacking of these co-benefits to be essential elements of the resilience insurance sales strategy that will eventually bring client demand to scale. However, while we have a clear understanding of the risk reduction profile of these coastal ecosystems, our understanding of what the various co-benefits are, and how they might be quantified as part of an overall product pitch to hotel clients, remains an important gap in our understanding. As discussed in our proposal, the proposed project aims to close exactly this gap by evaluating and articulating the value of co-benefits in two hypothetical hotel insurance resilience policies (one aimed at a US geography such as Florida, and the second aimed at a Caribbean geography, such as Belize). Beyond offering a platform for the students to help co-create an applied conservation solution, this project will offer a rich, varied, and relevant learning experience, delving into topics that include economic modeling, coastal engineering, stakeholder engagement, and risk transfer pricing. To optimize this learning experience, TNC will provide mentorship from our Global Oceans program and NatureVest, along with local TNC field staff, depending on the ultimate locations selected for the two geographies. In addition, an internship will be available under my direction at a convenient TNC office location (pending the identification of appropriate resources). We hope that we have convinced you of our commitment to this Bren School Group Project, but should you have any remaining questions or concerns, please feel free to contact us. Sincerely, Justus Raepple Manager, New Product Development, NatureVest justus.raepple@tnc.org +1 (630) i McCreeless, Erin and Beck. (2016) Rethinking Our Global Coastal Investment Portfolio, Journal of Ocean and Coastal Economics: Vol. 3: Iss. 2, Article 6.

7 d. Figures Figure I: The traditional trade-off between risk reduction and risk transfer Figure II: Theoretical construct of a resilience insurance instrument 7

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