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Insurance-driven infrastructure and safety improvements for the good of the public have a long track record. Kathy Baughman McLeod, director of climate risk and resilience for The Nature Conservancy, makes the case for insurers to increase municipal resilience while strengthening the health of the environment.
When we think about insurance, we think about covering our financial losses when a disaster or accident occurs. We are willing to pay a premium to protect ourselves.
But, over the years insurance hasn't protected us just financially; it also has protected us physically by reducing underlying risks and helping solve big societal challenges.
Take urban fire, for example. In the late 19th and early 20th centuries, fire was a major risk in urban life, with some of the world's most iconic cities consumed by it: Chicago in 1871, Boston in 1872, San Francisco as a result of a major earthquake in 1906, and Tokyo in 1923, another product of a major earthquake.
During this time, insurance companies were finding themselves too often on the losing end of the deal. So, the industry began to demand that cities upgrade their infrastructure — adding fire alarms, escapes and hydrants and enacting building codes to make structures more resistant — to qualify for coverage. Early fire stations, dating to the Great Fire of London in 1666, were owned by property insurance companies.
It was in the best interest of the insurers and the cities to reduce fire risk to people and property. The result: safer cities, innovative infrastructure and fewer expensive disasters.
Another example is automobile safety. We know that simply wearing your seat belt can reduce the chance of death in a car accident by more than 50%. And from the 1970s — when seat belts became standard in cars manufactured in the U.S. — to today, insurance companies have advanced their use, which has risen to 87% from the 14% recorded in 1983.
Geico, for one, makes this offer: “If you and your passengers always wear seat belts, you could receive a discount of up to 15% off the medical payments or personal injury protection portion of your premium.”
By providing an incentive for smart consumer behavior, the insurance industry has helped reduce premium and payout costs and lower the risk of fatal accidents. We know that seat belts reduce serious crash-related injuries and deaths by about half. At current usage rates, seat belts save an estimated 9,500 lives in the United States each year.
This century's mega risk
One of the most significant challenges today is climate change, which is posing new and unprecedented threats on a global scale. Much like the urban fires of the 19th and 20th centuries, devastating storms, floods, droughts and rising seas attributed to climate change are affecting communities that have never seen this kind of weather intensity and destruction before — and few are prepared.
The insurance industry can play a key role in helping minimize this devastation while helping devise solutions to climate risks and protect people and property.
The positive impacts could be enormous. The role healthy natural systems play in reducing climate-related disaster risks is gaining traction, and this area presents a huge opportunity to not only protect people and reduce costs, but also to save and restore nature.
Can nature reduce our climate premium?
At The Nature Conservancy, we explore all the ways nature benefits people and wildlife. We have more than 600 scientists all over the world studying how nature works, how to protect and restore it, and the benefits it brings to people.
We are increasingly exploring the role natural systems such as coral and oyster reefs, marshes and mangroves play in protecting communities from storms and floods. And we are measuring their ability to reduce risk and assessing their cost effectiveness.
For example, our scientists have determined that a healthy coral reef can absorb 97% of a wave's energy before it hits the shore, placing the reef's potential protective services on par with typically more expensive and less flexible man-made infrastructure, such as breakwaters and seawalls. In New York, oysters and marshes are great tools and are being restored and expanded as a leading post-Superstorm Sandy strategy to build resilience.
In many cases, we are finding that the best risk reduction solution is a blend of natural and man-made infrastructure. The conservancy is working with engineering companies to explore the optimal infrastructure mix in places such as the Gulf of Mexico and the Caribbean.
And the insurance industry is paying attention. Companies including Swiss Re Ltd., a global reinsurance industry leader in understanding climate risk, and Risk Management Solutions Inc., one of the largest catastrophe risk modelers in the market, are beginning to account for nature's protective services in their risk modeling.
By giving nature a value in risk assessments, they are seeing potential opportunities to reduce losses and increase the resilience of communities in the face of climate change and growing disaster risks.
And as was the case with fire and auto safety, this opportunity will not only pay economic dividends but also make us safer and promote innovative solutions for society.
Natural infrastructure solutions
Alex Kaplan, Swiss Re's vice president of global partnerships, pointed to a recent study by the reinsurer that found Barbados loses the equivalent of 4% of its gross domestic product each year in hurricane disaster costs. But the study also found that for every $1 spent on protecting and restoring mangroves and coral reefs, $20 in future hurricane losses are saved. And remaining costs become far more manageable through risk transfer.
Mr. Kaplan said the potential for natural infrastructure in places such as Barbados is “about allowing economic progress to continue.”
In addition to emerging innovations in risk modeling, the reinsurance industry is playing a key role in United Nations policy discussions for disaster risk reduction and climate change on how insurance can help address climate risk, reduce the cost of impacts to people and livelihoods, and increase a community's resilience.
This past June, United Nations Secretary-General Ban Ki-Moon invited the Global Insurance Forum — a group of the industry's senior leaders — to convene at the U.N. headquarters in New York City to explore climate risk and sustainable development.
This was the first time the industry convened under the U.N. roof on these issues — a significant affirmation of the role insurance can play. And I represented the conservancy at the table, attesting to the role nature can play in our solutions.
We are still in early days of this opportunity, but the answers we seek could be game changers for people and nature. What if you could save money on insurance premiums because you live near a thriving wetland or reef? And what if insurance companies protected wetlands, reefs, mangroves and other natural infrastructure by writing cover for them to help ensure those systems continue to protect us?
As the world prepares for more expensive climate-related disasters, the insurance industry can be a leader in not only reducing our climate costs but also making us safer and more resilient — while protecting nature, too.
Nature's premium is worth it.
Kathy Baughman McLeod is director of climate risk and resilience at The Nature Conservancy. She can be reached at firstname.lastname@example.org and 703-841-8791.
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