Parametric insurance policy to cover Mexico coral reef

The government of the state of Quintana Roo, Mexico, has purchased a parametric insurance product that would offer up to $3.8 million to repair hurricane damage to the reef starting in June.

The parametric insurance product, which will be provided by Mexico-based insurer Afirme Seguros Grupo Financiero SA de CV, will be triggered if wind speeds above 100 knots are registered within the covered area, with a payout split of 50% for reefs and 50% for beaches, according to a statement issued on Friday by the Nature Conservancy, which partnered with the government and other partners to devise the reef insurance policy concept.

“This is something which pays out traditionally very fast and that’s what’s really important in this case because a lot of the initial work that would need to be done on the reefs needs to be done very quickly to avoid further damage occurring to the reef and set up a successful recovery period,” said Mark Way, director of global coastal risk and resilience at The Nature Conservancy in Washington.

The payout will increase up to the annual aggregate limit over the 12-month policy depending on the wind speed: 110 knots or more will trigger a payout of 40% of the maximum limit, 130 or more will trigger an 80% payout while 160 knots or more will trigger a full limit payout.

Depending on the severity of storms, “the insurance policy would pay out up to that limit and if that limit is not met on the first storm, the second storm would still be eligible for a payout up to that limit,” Mr. Way said in reference to the possibility of multiple storms affecting the region in the same hurricane season.

Reefs sustain the tourism industry of Quintana Roo by providing coastal protection against storms, including by reducing beach erosion, but extreme storms put the reefs at risk, according to the Nature Conservancy. Category 4 hurricanes can wipe out up to 60% of live coral cover and cause severe structural damage in a few hours.

The Quintana Roo State Government announced the formation of the Coastal Zone Management Trust to finance the insurance policy and promote the conservation of coastal areas in the Mexican Caribbean in March 2018. This trust will direct conservation investments for the maintenance and repair of the reef and beaches while managing the insurance payout and ensuring conservation goals are achieved.

The partners in development of the reef insurance concept — the Nature Conservancy, the state government of Quintana Roo, the Cancún and Puerto Morelos Hotel Owners’ Association, CONANP, Mexican Universities and insurance industry representatives — believe this to be the first of this type of project to be implemented and hope it will serve as a model in building new insurance markets for this type of coverage, with conversations about potential projects in Asia, Australia and the United States, Mr. Way said.

“The aim is very much to take Mexico and replicate it,” he said. “We do not want this to remain a unique project. Not just about reef insurance — we want to see whether it’s possible to take this kind of approach to other ecosystems. Mangroves would be an obvious one.”

Swiss Re Ltd. was an early partner in the development of the concept. “They helped us basically confirm this whole idea was feasible,” Mr. Way said.