How innovative insurance solutions are protecting Mesoamerican reefs and communities

By Climate Champions | July 6, 2023

Partner: Ocean Risk Resilience Alliance (ORRAA),  Insurance Development Forum (IDF) &  Coalition for Climate Resilient Investment (CCRI)

Member: Willis Towers Watson WTW

Implementer: Mesoamerican Reef Fund (MAR Fund)

Countries and region : Mexico, Belize, Guatemala, and Honduras / Latin America and the Caribbean

Impact System: Ocean and Coastal / Finance

In the ever-expanding field of climate resilience, innovation is key. 2021 marked a significant milestone in this journey, as Willis Towers Watson (WTW) and the Mesoamerican Reef Fund (MAR Fund) joined forces to create the world’s first multinational parametric insurance cover for hurricane risk.

This project, dubbed the MAR Insurance Programme, is a brilliant interweaving of finance and climate risk management. Its purpose is to protect the Mesoamerican Reef – an ecological lifeline for Mexico, Belize, Guatemala, and Honduras. Communities here rely on the reef for protection, food security, and livelihoods, with nearly 2 million beneficiaries at its core.

Inception of the MAR Insurance Programme came with the backing of the Canadian government via Race to Resilience partner, the Ocean Risk and Resilience Action Alliance (ORRAA), and continuous support from the German government through the InsuResilience Solutions Fund (ISF). The insurance programme now covers key reef sites across these countries. The parametric mechanism – a cutting-edge concept in the insurance world – activates pay-outs after a qualifying hurricane event, providing financial resources for reef response brigades. AXA Climate, as the initial underwriter, was integral in launching this ambitious effort.

The success of the programme lies in its focus on rapid response. The goal is simple: conserve and restore the reef system as swiftly as possible following a hurricane. It proved its worth during its second year, when it not only expanded coverage to a total of seven sites but also added Munich Re as a second underwriter.

The first real test came with Category 1 Hurricane Lisa. The storm passed over Belize’s Turneffe Atoll, triggering the programme’s first pay-out. Within 14 days, insurers transferred $175,000 to the MAR Fund, which was able to mobilize the Turneffe Atoll Sustainability Association in under 48 hours. This rapid response and allocation of funds underscore the value of a pre-arranged, trigger-based mechanism like parametric insurance in responding to climate emergencies. The experience also offered valuable insights, leading to further refinement of the parametric structure to optimize premium use based on the local capacity of reef responders.

The programme continues to evolve and recently expanded to cover 11 protected reef sites across the Mesoamerican Reef region. ISF and the UN Development Programme provided premium support, and AXA Climate returned as the insurer following a competitive process.

The ripple effect of the MAR Programme’s success is already being felt, with replication projects springing up across various geographies including the broader Caribbean and the Pacific. These new initiatives are also tackling additional climate hazards, such as ocean heat waves and extreme rainfall-induced terrestrial runoff. WTW collaborates with local partners in these projects to ensure that pay-out use cases are tailored to their respective contexts – from immediate reef response to food and water provisions for affected communities, to compensating fishermen to reduce pressure on the reefs.

The innovative application of parametric insurance is also evident in the creation of the world’s first sovereign debt “resilience wrapper” as part of Belize’s 2021 private debt conversion. This mechanism safeguards Belize’s blue bond debt servicing payments following major hurricane events, relieving financial stress on the Government of Belize and freeing up funds for immediate disaster response. This has fortified the economy’s resilience, leading to a significant reduction in the cost of capital, evident in a lower interest rate on privately held sovereign debt and a significant improvement in the sovereign credit rating, thereby enhancing Belize’s investment proposition.

The work undertaken by WTW, the MAR Fund, and their partners is proof that with innovative financial instruments and commitment, it is possible to build a future where communities and ecosystems are better equipped to handle the challenges posed by the climate crisis. As we chart our path into this uncertain future, the model they’ve created offers a way to anticipate and mitigate risks, turning the tide in our favour in the Race to Resilience.

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