The 2017 Global Insurance Forum brought together more than 500 global insurance executives, regulators, academics and policy makers to discuss the role of the insurance industry in building global risk resiliency. Below is a compressed version of the keynote speech Mark R. Tercek, president and CEO of The Nature Conservancy, delivered at the Forum on July 19, 2017, in London.
Insuring Nature, Ensuring Resilience
Delivered on July 19, 2017
Thank you for the opportunity to speak with you this morning. It’s great to be here with senior leaders from the global insurance industry. I admire how you are thinking carefully and creatively about how the insurance industry can contribute to a resilient planet.
Today, I want to talk about two topics. First, and this is likely what you’d expect to hear from me, I want to discuss nature-based solutions: How can we invest in nature, our best and biggest asset, to boost resilience to severe weather and other climate impacts—and protect nature at the same time?
Second, and in my view, this is likely even more important—I want to talk about the need for bold leadership. What I’ve learned in my time at TNC is that business-oriented and market-based strategies like the ones I’ll be discussing today only take us so far.
What we also need are more business leaders to step up, think big, and follow their moral compass. We’ll talk a little bit about what that looks like in the insurance industry and how it can make a very positive difference, both for your business and the planet.
Very briefly, I want to tell you a little a bit more about who I am so you’ll know where I’m coming from. I wasn’t always an environmentalist. My background is on Wall Street, where I spent 24 years as an investment banker for Goldman Sachs.
At the time, I was living in New York City with my wife Amy and our four kids. Amy and I are both city people, but we wanted to start exposing our family to nature beyond the soccer field and swimming pool. We took family vacations to nature preserves and parks. The more time I spent in nature and learning about nature—the more I wanted to protect it.
As I was rising through the ranks at Goldman, I saw—and continue to believe—that business could be a powerful force for good and could materially help address some of the big challenges society faces.
I eventually went on to lead the firm’s first environmental effort—and one of the first in the entire financial industry. My job was to look for win-win opportunities where businesses could improve both their bottom lines and the environment’s. I didn’t have to look very far because I discovered these kinds of win-win opportunities existed almost everywhere I looked.
Finally, I decided I want to do this full time. When I heard that The Nature Conservancy was looking for a new CEO, I threw my hat in the ring. And lo and behold, after nearly a quarter-century on Wall Street, I got the job. It was the happiest day in my career.
So that’s me. I also want to briefly introduce you to The Nature Conservancy, TNC for short, and explain what role a conservation organization can play in the insurance space.
For 65 years, TNC has been known as a pragmatic, nonpartisan organization that brings diverse groups together to advance conservation progress. That approach allowed us to become the largest conservation organization in the world. We have some 4000 staff members pursuing conservation in 50 states in the U.S. and 72 countries around the world.
We started as a US-based land trust—buying land to protect it. But as threats to nature became more complex, we realized this strategy would only take us so far. So we took on new challenges, like marine, freshwater, urban conservation, and climate change. And we started using new tools—economics and social science, impact investing, influencing and guiding business practices. And we chose to become a truly global organization as we saw many important conservation opportunities outside the US.
In short, TNC reminds me of an investment bank—but one whose client is nature itself.
Much of our work today is focused on championing the idea of natural capital, and putting a value on nature as an asset. Natural capital provides critical services—clean air to breathe, healthy water to drink, fertile soil to grow our food, abundant fish to eat, a stable climate to live in, and—very important for today’s conversation—protection from floods and storms.
And that’s what I want to talk to you about today. You’re here because you’re leaders in this industry, and you’re thinking big about the future of your business in a changing world. You’re studying new emerging markets and creative approaches to building resilience and reducing risk. Guess what? We are too. I really believe that conservationists and insurance professionals are natural partners. We’re both focused on building resilience for people and our planet.
Making the Case for Nature
Why Nature Is an Asset
Let’s start with my first point—that saving nature is the smartest investment we can make.
At TNC, we’re working with businesses, governments, and communities to demonstrate that investing in nature can benefit both the environment and the economy. For example, we’ve found that planting a new forest can be a cost-effective strategy for businesses to comply with air quality requirements. Or, investing in watershed conservation upstream can improve water quality and reduce treatment costs for beverage companies and utilities. Or, improving natural infrastructure like rain gardens, porous pavement, and artificial wetlands can help cities address stormwater runoff—a leading cause of water pollution.
These natural solutions can be great investments. Often, they work just as well as—or even better than—traditional manmade infrastructure. They’re cost-effective. And they deliver important co-benefits—habitat for plants and animals, green space in underserved neighborhoods, and opportunities for recreation and tourism.
Let me break this idea down by focusing on a big area of interest to all of you: coastal resilience. First, let’s look at nature’s effectiveness in protecting coastal communities from floods, storms, and other climate impacts.
You may not all fully realize that coral reefs, coastal marshes and mangroves, and oyster reefs act like natural seawalls. It turns out these natural assets are very good at breaking waves and absorbing storm surge. A healthy coral reef can absorb on the order of 97% of wave energy. In other words, when water passes over a reef, the highest corals create friction. That friction reduces the wave’s force—that’s the wave’s ability to cause damage and erosion onshore. You can think of the reef as a natural breakwater. If the planet’s reefs lose just one meter of height, we can expect about twice the damage onshore.
To point to another example, just 100 meters of mangroves can reduce wave height by as much as 67%—while the roots, trunks, and canopy reduce the force of oncoming wind and waves and reduce flooding.
So, we know how much risk we can reduce with nature. But from there, we also need to know if these strategies are cost-effective. Does restoring and maintaining natural infrastructure cost less than building a sea wall or a levee, or putting a house on stilts? Most of the time the answer is “yes” – either for green infrastructure alone of for a blend of “green and gray.”
Let’s go back to that study I just mentioned on coral reefs and wave energy. Of course concrete breakwaters can do a similar job protecting shorelines from storm impacts. But researchers found that for 29 projects surveyed, the median cost of breakwater construction was some 15 times higher than reef restoration. What’s more, man-made infrastructure only depreciates in value overtime—green infrastructure appreciates in value. A living coral reef has the potential to repair and maintain itself.
So we know that green infrastructure works. And it’s cost effective. But there’s one more key point I want to make: investing in nature doesn’t just reduce risk—it adds value, too.
Unlike gray infrastructure, natural solutions do more—they also clean our water, support fisheries, provide wildlife habitats, and support recreation and tourism. Coastal wetlands store carbon in salt-soaked soils—and these marshes filter and clean the water. 95% of all wild ocean-caught fish depend on these coastal habitats at some point during their life. And just imagine a family packing up for a vacation to snorkel at a sea wall!
Now let’s translate these risk reduction findings to dollar figures. A recent study funded by Lloyds Tercentenary Research Foundation, along with Guy Carpenter and Risk Management Solutions, recently found that coastal wetlands along 12 US states hit by Hurricane Sandy saved coastal areas $625 million in avoided damages.
That’s a big number. And it’s noteworthy given how degraded the wetlands are along the eastern seaboard. We learned that just a little bit of sparse and small wetland vegetation can slow storm surge like an absorbing sponge. Just imagine how much more protection we could achieve by bringing back those wetlands to full health.
Why Nature Matters to the Insurance Industry
I’m sure these numbers aren’t a shock to you. And you’re probably not surprised, and may already know, that natural disaster is costing us $300 billion per year, and that climate change is displacing 68,000 people every single day.
But you may be surprised to learn what TNC brings to the table—what our science tells us about these losses and other opportunity costs for businesses and communities in coastal regions. And what perspective we can offer on new emerging markets for insurance structures that rely on natural solutions as a critical force in building resilience.
By way of example, let’s take a look at Cancun, Mexico. What if we could assign a dollar value to the protections provided by coral reefs for a stretch of hotels and restaurants in this tourist destination? And what if we tell those same hotels and restaurants what it would cost them in additional damages from a big storm event if their coral reef degrades and stops providing adequate protection?
We now have the data to answers these questions. We know that damages onshore triple with a one-meter loss of coral reef—which is the typical reef loss during a hurricane in Puerto Morelos, Mexico.
We’re getting better and smarter about collecting this kind of data. But we also need to get better at how we communicate just how powerful and protective the reef can be to the resilience of these economies.
Time is not on our side—indeed, I think we’re in the race of our lives. At The Nature Conservancy, we know that nature is a big part of the solution to reducing the growing risks posed by climate change and weather patterns. Coral reefs everywhere are under threat from ocean warming, acidification from climate change, over fishing, pollution, and more.
I want run a scenario by you, keeping Cancun in mind. What if we could put a parametric insurance policy on the reef and the beach, and pay out to quickly repair the reef and the beach after an extreme weather event?
At TNC, our marine scientists have developed protocols for “reef first responders” to quickly restore and manage damaged reefs, using manmade structures, like gabion baskets and geotubes, that are proven to integrate into the natural reef ecosystem over time.
There’s a cost to that science and there’s a cost to implementing it. Payout from a parametric policy would reduce the amount of time a reef is left damaged—and a coastline left unprotected. Instead, the policy holder would have the funds necessary to quickly activate a team to restore the reef.
Think about it. The reef is owned by the government, but the hotels are benefiting from the service of the reef. Is there a buyer for this coverage—as storms, floods, and erosion continue to threaten coastal tourism economies worldwide?
We think the answer is yes—and we are close to showing there are buyers for such policies. Indeed, when we look at the bigger-picture opportunity, we think that tourism-dependent coastal economies all around the world that rely on such coral reef protection can be a market for this product and approach.
TNC scientists recently analyzed all coral reef-based economies around the world and mapped those communities by tourism revenue, from $1 million to $40 million per square kilometer. Then we identified the countries receiving the most protection from coral reefs. When you overlay these two maps, you get you a good sense of the full market opportunity and the geographies to target for this type of product.
Parametric policies on green infrastructure are just one of many new products we think we can create. We’re also looking at a range of other ideas, including reduced premiums for property owners protected by healthy natural infrastructure. This would incentive those parties to help keep that infrastructure healthy. And nature-based captives, where companies create their own insurance companies to cover the protective services of natural infrastructure.
These new types of products could build resilience for people and economies, help close the protection gap, grow markets and investment opportunities for the industry—and help protect and restore nature.
This work is new, but it’s not distant. I believe that if we can bring top-notch science from organizations like TNC with the forward-thinking expertise of folks like you, these sophisticated, nature-based insurance products could make a real tangible difference in the very near future.
The Need for Leadership
I started today off saying that I wanted to cover two important topics. We’ve gone through natural solutions, and I hope you will agree with me that there’s some “there, there.”
But for this to really take off—for it to really be profitable for business, effective for conservation, and sustainable for communities—it’s going to require leadership. Such leadership—especially by people like you—is the second thing I want to talk about today.
What Can You Do?
In my job, people often say to me me, “I get how someone like you can make a difference for the environment; you’re the CEO of an environmental group. But what can I do?” I love when people ask that question.
My answer: “There is a lot each and every one of you can do.” There’s no shortage of ways each one of you can make a difference, as citizens, with young people, as business leaders
First, as citizens you can engage in politics. No matter what country you’re from – and in US these days especially—we need more citizens to speak up for nature. Ask yourself: are you doing everything you can—as a citizen—to show your government leaders that you care about a resilient future for people and the planet?
In particular, I urge you to show courage and join the voices of businesses around the world calling for smart climate policy, including a price on carbon. Most economists agree this is the best way to quickly reduce emissions at the lowest cost. Speak up about the risks that climate change poses to communities and economies. Clear messages from business leaders like you will help reframe the climate policy debate.
Second, as parents, uncles, aunts, grandparents, neighbors, or in many other ways, you can connect young people with nature. Take kids outside. Teach them about why it’s so important to protect the lands and waters that sustain us. Help them begin building a conservation ethic.
And finally, as business leaders, you’re all in a powerful position to make a positive impact on the environment. I’ve now been advising business leaders on this front for more than 12 years. First, for 3 years at Goldman Sachs, and now for more than 9 at TNC. I haven’t met a single business that can’t find significant opportunities to take steps that improve both business and environmental outcomes.
This is especially true for the insurance industry. The insurance industry has a long history of introducing new approaches that help societies mitigate risk. From standard safety practices to prevent urban fires, to seatbelt mandates that limit auto deaths, and even healthy behavior changes like smoking cessation.
These ideas—at one point—were NOT part of the mainstream.
We’re on the verge of a new financial and resilience breakthrough—where nature can benefit—as well as your businesses—and you all are in on the ground floor. I believe that you and your industry can help build new markets and lines of products to do this. I know you can bring your knowledge and industry experience to these nature-based products that are part of a larger resilience solution.
We’re confident, but we know we still have gaps to fill in our knowledge and science. We lack sufficient and longitudinal data for investors on natural asset performance. And we know this is not yet a mainstream idea for insurers, financiers, and engineers alike. We will be continually challenged to create efficient ventures that protect natural assets that benefit both public and private interests.
Building a new global insurance market based on nature will take time, investment, philanthropy, innovative thinking, technical advice, and lots of serious partnerships. We seek that help from you and your companies and colleagues. Here are a few asks I have of you today.
First, talk to your colleagues about these ideas—we need all the help we can get in building industry awareness and mainstreaming the value of nature into insurance models to incentive its protection.
Second, look for opportunities to participate in and fund additional studies on the protective services of various natural capital assets, including mangroves, dunes and floodplains. We need more data and good ideas to help communities, engineers, and investors make decisions about the most effective and cost-effective ways to reduce risk.
And finally, please consider supporting and working closely with environmental nonprofit organizations like TNC.
If you do all these things, you’ll be helping to protect people, secure coastal economies, grow your industry–and ultimately sustain the lands and waters on which we all depend.