Underwriting Earth: Nature-positive insurance

For decades, the insurance industry has used catastrophe risk models, which use past events and historical data to estimate what future losses could look like, but many of these do not take nature risk into account.

Technological advances are already helping to resolve data-related problems in agricultural insurance. Remote sensing, advanced modeling, and picture-based recognition solutions have enabled the underwriting of groundwater and soil quality as metrics for crop insurance.

Several frameworks also now exist to account for the economic value of natural assets. One is the Natural Capital Protocol, which enables organizations to identify, measure, and value their direct and indirect impacts and dependencies on natural capital.

Property insurance is already being used to protect and regenerate natural assets such as forests and mangroves or to mitigate the risks of projects, including those designed to protect against climate change or promote biodiversity.

This approach to protecting natural assets could be emulated in the American heartland. For example, insurers could offer financial incentives to farmers who adopt nature-based solutions (NBS) to help restore wetlands and improve the resilience of agricultural land.

Rather than pull back from insuring challenging sectors such as agriculture, the industry can tap existing relationships to catalyze meaningful change and reduce the potential for claims through policy incentives that support the protection of natural capital.

Policy innovation has introduced parametric techniques to link liabilities to the severity of weather events—the same opportunity to innovate exists to bring capital market investors into the fold in the biodiversity space.

In the agriculture sector, US insurers can look to provide incentives for farmers who take steps to promote soil quality, much in the way that some providers in the country are now offering discounts for homeowners in fire-prone states who take steps to protect their houses from wildfires.

Insurers can be instrumental in redirecting financial flows toward both climate objectives and the protection and restoration of nature. However, for that to be able to happen, the value of nature needs to be integrated into underwriting.

In Europe, insurers are offering environmental impairment liability (EIL) coverage for preventive environmental measures, expanding their purview beyond instances of pollution. Such policies have emerged as a hybrid insurance solution that covers gaps in most third-party liability insurance that excludes impacts such as biodiversity loss. Studies have shown these approaches could be improved further to incorporate a broader range of sustainability risks, such as ecosystems degradation or destruction.

New forms of policies the US agriculture sector could employ include carbon credit insurance—an emerging mechanism that could be used to insure farmers against shortfalls in expected carbon sequestration yields from improved soil health or no-till agriculture. Another example is supply chain disruption insurance, which could be used to cover farmers in the event of unforeseen breaks in the supply chain caused by environmental events or outbreaks of disease.

Insurers have a pivotal role to play in protecting and rehabilitating natural capital, but policies and regulations can help to incentivize market participation in insurance solutions. Industry members should be more involved in developing the taxonomies and reporting requirements for measuring biodiversity.

They can also lend their voice to advocating for policies that support the adoption of nature-based solutions, promote risk-sharing mechanisms such as public-private partnerships where governments would share the burden for nature-related losses, and incentivize sustainable practices through tax breaks for adopting regenerative agriculture methods or implementing biodiversity-friendly practices like cover cropping.