Re/insurance and Biodiversity: Insights on a Swiss Re Report
Updated: Jan 17
'5 Things to Like' and '5 Things to Watch' from this Swiss Re report
Most people involved in nature conservation don’t spend too much time thinking about the connection between biodiversity and re/insurance
But we really should.
Insurance, Re/insurance, and Climate
To be honest, most people don’t even know what “re/insurance” is. Simply put, these are the companies that insure the insurance companies. That means they operate at a macro level, watching the highest-level trends that affect insurance risk. They are also a pretty agnostic group, driven by the actuary data, and therefore relatively immune to politics and zealotry. Because when they get it wrong, they pay, potentially in a big way.
For example, in the re/insurance realm, “asbestos” is a legendary boogey-man. They got that one wrong, completely misjudging the risk to the insurance industry, and watched as numerous insurance companies went bankrupt. As an industry, re/insurers are always seeking to get ahead of 'the next asbestos,’ and doing so with a data-driven open mind. It should be no surprise then that one of the biggest re/insurers, Munich Re, was ringing the alarm bell about climate change in the 1970s, after watching natural disaster claims start to climb. All the big re/insurance companies still employ teams of climate modellers and meteorologists, and they are all clear that climate change is real, and represents a serious risk to the industry.
You can imagine that an insurance company telling a municipality, provincial government, grocery retailer, forestry company, portfolio manager, etc. that they should be concerned about climate change gets a different reception than when a climate activist does. This has been a significant driver in public policy beginning its pivot toward action on climate.
So when re/insurers start devoting serious attention to the risk associated with the loss of biodiversity, it should not be taken as a boutique effort or virtue signalling.
“A Business Case for Biodiversity and Ecosystem Services”
It matters to ecosystem services which species are abundant and how many species there are.
– Swiss Re Institute
The title alone would have caught my attention. But the fact that this report was produced by the world’s largest re/insurance group really drew me in. The Swiss Re group has 15,000 employees in 25 countries, assets of $240B and revenues of $50B/yr; to say they are a major player in the insurance field is an understatement.
Last year, Swiss Re’s research arm, the Swiss Re Institute (SRI), released a report called, Biodiversity and Ecosystem Services A Business Case for Re/insurance. This was not a heart-string pulling account of the impacts on communities and aspirational plea for something to be done, but a business case that talks about this liability and risk in stark, financial terms.
For example, the report references an analysis from the Dutch National Bank (DNB) that assessed “the risks stemming from biodiversity loss and ecosystem services decline on investments held by Dutch financial institutions.” That study found that “36% of the €1.4 Trillion in investments held by Dutch financial institutions, is highly or very highly dependent on one or more ecosystem services.”
SRI really draws blunt connections between the loss of biodiversity & ecosystem services and the impacts that has on the insurance industry, linkages like:
respiratory diseases increasing in the absence of forests,
loss of natural erosion protection for properties in the face of storm surges, floods, and landslides,
business interruption in shipping and power interruption during drought, and
adverse consequences for agriculture due to water scarcity and/or soil degradation.
To get in front of this issue, the Swiss Re Institute developed a Biodiversity & Ecosystem Services (BES) Index. The goal was to frame biodiversity and ecosystem services in the context of insurance and re/insurance risk and opportunity, because, “To understand if BES are on the decline, we need to know which ecosystem services are relevant in a given location and measure their health status.”
So how did they do? Well, here’s my take on 5 things to like in this work, and 5 things
that need a discerning eye during implementation.
5 Things to Like
Species loss can destabilise ecosystems and can suddenly disrupt the flow of benefits from nature to people because of the interconnection of species and ecosystems.
– Swiss Re Institute
There is much to like about this work. Here are 5 positives I think we should take note of.
That it Exists
It’s hard to overstate the importance of something like this coming from the place it did. Elizabeth Mrema, executive secretary of the UN Convention of Biological Diversity, said the main deficiency of the 2010-2020 global strategic plan for biodiversity (the Aichi Targets) was the failure to engage the finance community. When the flows of capital are ignorant of biodiversity loss, it is virtually impossible to halt that degradation.
Of course, the concept here is not new, but the context is. This is not an aspirational doctrine from an obscure source; it is a major business thrust from the world’s largest re/insurance company. And this comes from within an industry whose sole purpose is to understand financial risk and identify emerging opportunities at a global scale.
Borrows From the Right Places
While the Swiss Re Institute’s Biodiversity and Ecosystem Services (BES) Index is their own creation, they drew from many of the right places for its background research and design. For their "Biodiversity and ecosystem services threats classification", they adopted the IUCN‘s Classification of Direct Threats. To develop their "Biodiversity and ecosystem services decline: relevance for re/insurance matrix", they used information from the Economics of Ecosystems and Biodiversity (TEEB), World Economic Forum (WEF), OECD (Organisation for Economic Co-operation and Development), and Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES). For their overarching ecosystem service framework, they used the Millennium Ecosystem Assessment.
It’s not just that these are credible sources, but that these are shared sources. One of the greatest challenges we are facing right now in incorporating biodiversity and ecosystem service considerations into finance is the impulse to constantly re-form our base concepts, which causes divergence and confusion
Clear Picture of a Complex Dynamic
It is hard to reconcile the theoretical and the practical. We probably all knew there are linkages between biodiversity loss and insurance, but we’d probably all struggle to diagram it. Properly representing indirect drivers of biodiversity loss vs direct drivers is a key step toward practitioners seeing their place in that dynamic, and the SRI report does this well.
The report also brings in critical factors that are often missed. A number of conceptual models draw the links between threats like floods and impacts like infrastructure loss. However, in drawing links between biodiversity / ecosystem service decline and the relevance to their industry, the SRI puts factors like licence to operate, reputation loss, and increased regulation at the same level as (e.g.) a damaged rail line.
Separation of ‘Exchange’ Value and ‘Market’ Value
I know, this sounds like an economist geeking out, but trust me, this reflects an issue of huge fundamental importance. So big, in fact, that former governor of the Banks of Canada and England, Mark Carney, just released a book about it called “Value(s)”. In it, he argues that we have unwittingly transitioned from a market economy to a market society, where instead of pricing the things we value, we only value the things we price.
The ecosystem services concept can struggle from a tendency in some quarters to assume if you put a price on an ecosystem service, then somebody should be ready to write a cheque for it. But understanding something’s might in affecting the economy (market value) can just be intended to show it plays a role of certain heft, not that it should be put up for sale (exchange value).
The SRI report avoids that trap, and makes it clear that many elements that are not priced need to be considered in the context of financial decisions, and many of those relate to ecosystem services. This would include slope stability, climate regulation, pollination, species richness, etc.
Not Just the Downside
The economics of biodiversity loss is generally presented as a tale of tragedy or a tale of vultures; you either lose money, or you make money off of someone’s misfortune. But that is not the full story.
The SRI does a great job of characterizing a global economic shift, where emerging ‘green’ initiatives involve smart investments, sizeable players, and good insurance risks. In other words, it is not just about the downside of direct liability and risk, it is about the upside of pursuing nature-positive enterprises. Again, this is not presented as a hopeful sigh, but deftly added to the list of factors that must (increasingly) be considered in investment and insurance decisions.
One element that stands out is the repeated references to what could be called the ‘restoration economy.’ For a long time restoration was viewed as a drag on the economy, a regulatory burden and a loss in productivity. Increasingly (and very much in this report), restoration of damaged or degraded natural ecosystems is seen as a booming business opportunity, and not just as a moral imperative expected by society, but as a smart investment to ensure the continued flow of beneficial ecosystem services.
5 Things to Watch
As excited as I am about this evolving focus of the re/insurance industry on biodiversity, there are seeds of concern for me in this work.
Some Simple Assumptions
Some of the concern relates to the macro-perspective I was lauding earlier. These are planet-wide assessments, and they apply some ‘global’ assumptions: trees good; livestock bad; hunting bad. They go on to note in a couple of places that context matters, but the assessments, rankings, and pass/fails still have these perspectives baked in.
I look out my (metaphorical) window onto North America’s savannah where trees are often encroaching weeds, where some systems require (and receive) sustainable grazing, and where hunters and anglers are a fundamental part of our conservation successes, and I see the disconnects here.
Similarly they use the easily-misunderstood ‘habitat intactness’ metric. The average person tends to think of this like a math test: 95% is good. But this is a system, so it should be thought of more like a body. Losing 5% of your body is a problem. If that 5% is your hand, that’s bad, but manageable; if that 5% is your heart, the entire system fails.
Know Your (Data) Limits
The BES Index and its underlying modelling are have some important data limitations to be aware of. To be clear, this isn’t necessarily a problem – it’s a limitation.
The BES Index focuses only on terrestrial data / issues. They note that marine/aquatic systems are critically important, but that most of the issues of concern for them (i.e., insurance-related) exist on land.
As well, the Index is built around 10 ecosystem services, which – while well chosen – represent a limited subset.
Perhaps the most significant limitation is that they chose their indicators - as all modellers do - partially based on data availability, meaning if no one has collected, tested, analyzed, and shared data on something, it’s not recognized as important.
In all these cases, SRI is transparent about these limits. So while this is currently a limitation, it only becomes a problem when users assume they have a complete data picture, which leads to the next point.
It’s a Product for Sale
There’s a subtle shift about halfway through the report.
Right from the beginning, it is clear this report is focused on the insurance industry, which is the great contribution of this work. The information provided in the first half strives for rigour, adoption of tested standards, and evidence-based utility.
When the report shifts to talking about the possible uses of the actual BES Index, it feels like it was handed over to the marketing department. You find out all the data is behind a paywall accessible only to their clients, and the descriptions of its utility get a bit panacean. It becomes hard to imagine a business scenario it can’t support.
If Moses were around today, he would come down off the mount with maps carved into tablets, because as soon as something is presented as a map, it tends to become cartographic scripture. This presumed authority is often unearned, and usually unintended; cartographers, modellers and GIS technicians know these limitations, and they intuitively see them when they look at their products. It’s more about how they are presented and perceived.
The map outputs of the BES Index, with a diverse range of colours, spread across every square inch of the Earth, look very authoritative. But given the assumptions, and limitations in data and intended use, the picture is perhaps a little too clear. For example, the map legend colour for “Prioritize Conservation” makes the Boreal and the Amazon stick out like a green thumb; the grasslands of North America, however, apparently require no active conservation.
The reality is that some of the relationships within the data lend themselves to maps, but many do not. While the fault often lies with the user, one has to assume they will look at the map and not the methods.
The user is also the one tending to push to “zoom in.” The BES Index looks very complex at a global scale, but while you can always split a pixel into more parts, the data rarely scales down so easily, so local/regional applications become very suspect. This becomes a problem when the mapping tool is marketed that way.
The Leap to Implementation
The kernels of this issue lie in the name itself, “Biodiversity and Ecosystem Services.” ‘Biodiversity’ is a state, measurable regardless of whether humans are present; ‘ecosystem services’ are the benefits we derive from nature, only measurable based on human needs and wants. Inextricably linked, but different.
This matters here because businesses/insurers benefit from the flow of ecosystem services, and tend to buy in when they see that threatened. An assessment of the state of the system leaves them to make grand leaps to understand linakges and relevance.
To be fair, this is where we all fall down, but my expectations were high. The context-setting section of the report does such an amazing job of framing the relationship between the insurance business and biodiversity-related risks. Unlike many financially-focused assessments, it gives real consideration to intangibles like indirect liability, non-market ecosystem services, and the impact of regulatory change and social licence.
More dotted lines will be needed between ecosystems à functions à benefits à humans (and their insurance needs).
Conclusion ..? A Call to Action
If we had to articulate environmental policy recommendations, it should be a matter of urgency to improve the ecological conditions of the fragile locations and maintain the intact locations. This could be achieved through ecosystem restoration – which is an opportunity for many economic sectors – and/or through a systematic and continuous reduction of negative impacts of socio-economic activities.
– Swiss Re Institute
I wouldn’t want my concerns to be taken as an indictment of this work; more an observation of issues that will arise with local implementation. But these are early days, and this work is provisional. Perhaps most importantly, this work is being led by the financial sector, whose mindset is keyed to reducing large, complex datasets into “yes/no” investment decisions.
This is an insurance / investment perspective on biodiversity at risk, and our job as conservationists is not to debate the validity of this viewpoint, but to understand it, and understand where its limitations are with regard to conservation science.
So my concerns should be taken more as a call to action of sorts for conservation scientists of all stripes. While the financial assessments may err on the side of simplicity, one of our fundamental sins in the science/policy interface is to bemoan the complexity of nature and fall back on a perennial call for perpetual data gathering. Our efforts at ‘decision support’ can often be more ‘decision obfuscation.’
The involvement of the insurance and finance sectors in biodiversity protection adds new urgency to bridging this simplicity/complexity divide. Simply counting trees, species at risk, or farms does not measure biodiversity nor its threats. The weighty resources of conservation data, evidence, and expertise need to be thoughtfully incorporated.
But the reality is that financially-driven decisions that affect biodiversity are occurring on a second-by-second basis, and time really is of the essence.
So where is the workable and effective middle ground?
That’s a wicked problem, to be sure. But to move toward in determining that answer, I would suggest to conservation scientists that your next critical partnership might be with a financial portfolio manager or an insurance company.
Retsa, Anna, Oliver Schelske, Bernd Wilke, Gillian Rutherford, Rogier de Jong. 2020. Biodiversity and Ecosystem Services A Business Case for Re/insurance. Swiss Re Management Ltd. Zurich, Switzerland.