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The risks of nature loss and the risk reduction value of nature

The planet is experiencing a dangerous decline in nature. The loss of biodiversity threatens the real economy but risk transfer can facilitate nature-positive investments, Carolyn Kousky explains in this blog.

We are in the middle of a global mass extinction event, with one million plant and animal species facing extinction within decades and with extinction rates tens to hundreds of times higher than the past 10 million years. Our current exploitation and degradation of the natural world is creating substantial costs and threatening our long-term economic prosperity. The World Economic Forum has estimated that more than half of the world’s Gross Domestic Product, at $44 trillion, is highly or moderately dependent on nature.

Biodiversity is essential to global food security, underpins our fight against disease, buffers natural disasters, filters our air and water, secures the livelihoods of billions of people, and contributes positively to non-material aspects of our quality of life. Loss of biodiversity creates risks to the real economy, which are then transmitted to financial and insurance markets. The risks for insurers are multifold, including risks of: higher claims payments, lower investment returns, higher operating costs, reputation impacts, and/or increased regulatory and transition risks.

Nature preservation will not just mute these potential negative consequences to the economy, but can also help manage the growing physical risks of climate change. Climate risks are escalating across the world, threatening to create an uninsurable future. Disasters that cause at least $1 billion in damages have been increasing globally. This last year was the fourth year in a row where insured costs from natural disasters exceeded $100 billion, driven not just by acute events, such as tropical cyclones, but also growing losses from hail, storms, and floods.

The costs of these climate extremes are destabilizing insurance markets in some regions of the world, such as parts of the United States. Right now, some regions of the U.S. are dealing with related challenges of insurer insolvencies, rising prices, hallowing coverage, and insurer exits from high-risk areas. This can have spillovers into housing markets and negatively impact local economies. While the impacts of climate on insurance pricing and availability are more acute in the U.S. right now, there are concerns that price increases in Europe are likely to grow, as well.

The only long-term solution to stabilize insurance markets is transformative levels of investment in lowering climate risks. This first requires speeding decarbonization. And then also requires expansive climate adaptation, including building and land use changes with our climate future in mind. But nature has a critical role to play in lowering climate risks, as well. Coastal ecosystems can buffer storm surge, inland wetlands can store flood waters, ecological forestry can lower risks of catastrophic wildfire, green infrastructure can absorb higher rainfall, and urban forests can mitigate extreme heat.

Not only can nature help insurance by lowering risks, but the global insurance sector has a range of tools to help promote and support nature positive outcomes. First, when nature is providing risk reduction services, insurers can reduce premiums to reflect this improved safety, creating a financial incentive for nature-based approaches. Unfortunately, right now many models used for insurer underwriting and pricing fail to reflect the risk reduction benefits of nature, making this challenging. Insurers, researchers, and modelers should work together to better account for nature’s risk reduction and then transparently communicate these benefits and reward communities for investing in nature-based approaches.

Insurers can expand their underwriting to provide coverage for risks associated with nature-positive activities, such as liability insurance for prescribed burns or coverage for loss of forest-based carbon credits. Insurers can also restrict coverage for ecologically damaging activities, particularly in sensitive areas. For example, AXA has pledged to stop underwriting firms contributing to biodiversity loss in key sectors, such as production of palm oil, soy, cattle, and timber, and to work with others in these supply chains to adopt more sustainable approaches.

Finally, insurers can also publicly support government conservation efforts and philanthropically support expanded protection of natural systems. For example, several insurers operating in Canada have teamed with Ducks Unlimited to fund investments in wetland protection that provides a range of ecosystem services, including flood mitigation. As environmental risks continue to escalate, insurers, as global risk managers, can harness their tools and approaches to lead the transition to a nature positive economy.

The author

Carolyn Kousky is the Associate Vice President for Economics and Policy at the Environmental Defense Fund, specializing in climate risk management and resilience policy. She authored “Understanding Disaster Insurance” and co-edited “A Blueprint for Coastal Adaptation”. Kousky holds key roles in various advisory groups, including the California Climate Insurance Working Group and the Federal Advisory Committee on Insurance. She is affiliated with multiple prestigious institutions such as Brookings Metro and the National Academy of Sciences.

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