Parametric Insurance Incentives for the Protection of Coral Reefs
A set of clauses to sit within a parametric insurance policy that incentivise insured parties to provide for the rapid restoration of coral reefs after catastrophic weather events.
What this clause does
Provides an opportunity for insurers and their lawyers to close the substantial protection gap. It is estimated that 60% of economic losses that stem from climate-induced natural disasters are uninsured.
Clauses
Additional Provisions in Policy Schedule
Coral Reef: [insert name of the insured coral reef]
Primary Payout: [insert agreed payout amount]
Primary Premium: [insert agreed monthly premium amount]]
Coverage:
Primary Triggering Events
Aggregate Wind Speed Events
[insert other events triggering the cover - for examples, see definitions of Additional Triggering Events below]
Grace Period: [insert grace period]
Additional Operative Clauses
1. POLICY COVERAGE, PAYOUTS AND PREMIUMS
1.1 The Insured will pay the first Primary Premium on or before the Effective Date of this Policy and each [subsequent]/[monthly] Primary Premium on or before the end of each calendar month after the Effective Date of this Policy.
1.2 If the Insured breaches clause [1.1] (for example, it fails to pay the Primary Premium, it pays the Primary Premium late or pays the Primary Premium after the Grace Period has expired), the Policy will cease on the day after the premium due date [except as provided by the Grace Period].
1.3 [If the Policy ceases as a result of the Insured’s late payment of the Primary Premium, the Policy may resume from the date of the late payment subject only to the Insurer’s prior written consent].
1.4 [Immediately on]/[No later than [2] days after] a Primary Triggering Event, the Insurer will pay the Primary Payout to the Insured.
1.5 Subject to clause 1.6 and absent a Primary Triggering Event, if there is an Aggregate Wind Speed Event the Insurer will pay the Primary Payout to the Insured [no later than [2] days] after such Aggregate Wind Speed Event.
1.6 If there is a Primary Triggering Event and an Aggregate Wind Speed Event within a period of [four/ eight] weeks and both are caused by the same Catastrophic Weather Event the Insured will be entitled to, and the Insurer shall make, only one Primary Payout.
1.7 The Insured shall use the Primary Payout to do Reparative Work immediately after a Primary Triggering Event or Aggregate Wind Speed Event [(and, where there is an Aggregate Wind Speed Event, where reasonably practicable, between each Catastrophic Weather Event)].
1.8 The Primary Premium and the Primary Payout are subject to the Incentives in clause [2] and the Dual Trigger in clause [4].
2. INCENTIVES
[Drafting note: The Incentives in clause 2 represent a list of potential incentivisation mechanisms that may be inserted or omitted from a particular policy as determined by drafters/ agreed between the Insurers and the Insured and determined by particular circumstances.]
2.1 The Insured shall be entitled to benefit from the incentives set out in clauses 2.1.1 to 2.1.2 below (the Incentives):
2.1.1 Premium reduction
The Insured will be entitled to a [insert percentage] reduction to the Primary Premium in respect of the next [year/ policy period] under this Policy or, where the Policy expires at the end of the relevant Policy year, in respect of the premium offered by the Insurer for renewal of this Policy, provided in each case that the Insured has deployed the following [prior to the end of the relevant Policy year]:
2.1.1.1 the Climate Change Adaptation Measures listed in Schedule [A]; or
2.1.1.2 the Insured’s own funds in addition to any Primary Payout for Reparative Work after a Primary Triggering Event or Aggregate Wind Speed Event[, or any Catastrophic Weather Event].*
The Insured and Insurer shall nominate a Coral Reef Specialist to record and assess the Insured’s deployment of Climate Change Adaptation Measures and/ or Reparative Work:
(i) in [a]/[an annual] [Survey]/[Report] in respect of Climate Change Adaptation Measures; and
(ii) [on an ad hoc basis]/[after] [a Catastrophic Weather Event,] Primary Triggering Event and/ or Aggregate Wind Speed Event in respect of Reparative Work.
[The fees of the Coral Reef Specialist shall be paid by [the Insurer]/[the Insured]/[jointly in [equal] shares by the parties].]
* [Drafting note: Remove the bracketed text at clause [2.1.1.2] if it is not intended that a premium deduction should apply where the Insured’s own funds are used after a Catastrophic Weather Event (which is not in itself a trigger for payment under this Policy) in the absence of a Primary Triggering Event or Aggregate Wind Speed Event.]
2.1.2 Multiple payouts
If at least [two/ three] Primary Triggering Events or Aggregate Wind Speed Events occur within a period of [four/ eight] weeks and each of such Primary Triggering Events or Aggregate Wind Speed Events are caused by separate Catastrophic Weather Events, the Insured will be entitled to and the Insurer shall make [two/ three] Primary Payouts to the Insured.
[Drafting note: Users of this clause may wish to take expert climate advice to finalise the drafting of the multiple payouts incentive. Users of this clause might seek expert climate advice on questions like (i) What is the likelihood of multiple different catastrophic events taking place within a four to eight week timeframe? and/ or (ii) Does the interaction of clauses [2.1.2] and [1.6] set too high a bar for Insured and Insurer?]
2.1.3 Premium payment moratorium
The Insured’s obligation to pay the Primary Premium pursuant to clause 1.1 shall be suspended for [three/ four months] if there are [three] or more Catastrophic Weather Events, Primary Triggering Events, or Aggregate Wind Speed Events over a period of [four/ eight] weeks.
3. DUAL TRIGGER
3.1 The Insured shall notify the Insurer of a Dual Trigger [as soon as reasonably practicable after becoming aware of it].
[Drafting note: Consider making the notification automatic, rather than incumbent on the Insured. If the source of information of the Insured is the national weather media (as set out in the current definition of Dual Trigger), it would be necessary that an expert third party be appointed to verify that the notice of the Insured is correct and confirms to the Insurer the Dual Trigger.]
3.2 The Insurer shall make an advance payment of [25%] (the Dual Trigger Payout) of the Primary Payout [immediately on/ no later than [6] hours after] the notification of a Dual Trigger under clause 3.1.
3.3 If a Dual Trigger Payout is made and is followed by a Primary Triggering Event or an Aggregate Wind Speed Event, the Insurer shall pay the remaining Primary Payout (less the Dual Trigger Payout) to the Insured in accordance with clause 1.4 or 1.5 above.
3.4 If a Dual Trigger Payout is made and is not followed by a Primary Triggering Event or an Aggregate Wind Speed Event, a sum equivalent to the Dual Trigger Payout shall be added to the next monthly payment of the Primary Premium.
3.5 The Insured shall use the Dual Trigger Payout to prepare the Coral Reef for the anticipated impact of a Primary Triggering Event or Aggregate Wind Speed Event and/ or implement Reparative Work as soon as practicable before and immediately after a Primary Triggering Event or Aggregate Wind Speed Event [(and, where there is an Aggregate Wind Speed Event, where reasonably practicable, between each Catastrophic Weather Event)].
[Drafting note: Consider if the Dual Trigger Payout is a sufficient/ appropriate mechanism for protecting the coral reef in the days/ hours before it is struck by the Primary Triggering Event or Aggregate Wind Speed Event.]
Schedule A
Climate Change Adaptation Measures
1. Removal of terrestrial debris
2. Coral microfragmentation
3. Coral gardening
4. Coral transplantation
[5. Insert other measures]
[Drafting note: Users of this clause may need to add more technical detail to the list above and consider if there is a specified level at which such measures must have been deployed in order to be entitled to the Incentive.]
Human-Induced Event occurs when:
(i) a vessel sinks or becomes stranded no further than [●] km distance from the Coral Reef, or collides with the Coral Reef;
(ii) [Insert other human-induced uncertain events (as opposed to predictable processes) that might endanger coral reefs that should be captured in this definition].
Sedimentation Event occurs when the Coral Reef is exposed to [●] mm of Sedimentation for [● days/ weeks].
[Drafting note: The authors of this clause understand that the photophysiological stress that sedimentation causes to corals correlates with the amount of sedimentation multiplied by exposure time (see this research). The definition of Sedimentation Event has been drafted on the assumption that the amount of sedimentation is measured by the size of the layer deposited on the corals. The authors recommend that users of this defined term seek expert advice on this point and consider matters such as the likelihood of a sedimentation event, in respect of whether it is likely to be covered by the policy.]
Definitions
[Drafting note: Users of this clause may wish to take expert advice on some of the matters touched upon in the definitions, for example ensuring that the triggering events are properly defined according to subject matter experts and the latest science.]
Aggregate Wind Speed Event means wind speeds that in aggregate are equal to or more than [80] knots [over concurrent Catastrophic Weather Events] over a period of [four/ eight] weeks within [insert vicinity] of the Coral Reef.
Catastrophic Weather Event means adverse weather conditions which result in, or are likely to result in, severe or widespread levels of damage, harm or disruption to the population, infrastructure, environment and/ or economy including without limitation hurricanes, tornadoes, blizzards, droughts, wildfires and heatwaves within [insert vicinity] of the Coral Reef.
Climate Change Adaptation Measures means the preventative work to the Coral Reef undertaken by the Insured as detailed in Schedule [A] to avoid any anticipated impacts of Primary Triggering Events, Aggregate Wind Speed Events or Catastrophic Weather Events.
Coral Reef Specialist means [insert name and organisation of expert].
Dual Trigger means (i) [insert name of agreed source of meteorological data*] issues the predicted trajectory of a Catastrophic Weather Event at least [24] hours before it reaches the Coral Reef, and (ii) [insert name of agreed source of meteorological data] predicts that a Primary Triggering Event or an Aggregate Wind Speed Event will occur.
* [Drafting note: The source of the meteorological data should be an independent/ official meteorological research centre agreed by the parties. Consider if the parties should appoint a specialised third party to verify such data.]
Dual Trigger Payout is defined in clause 3.2.
Incentives are defined in clause 2.
Primary Triggering Event means that a hurricane’s wind speeds are equal to or more than [80] knots within [insert vicinity] of the Coral Reef.
Reparative Work means work carried out to repair damage caused by a Primary Triggering Event, Aggregate Wind Speed Event and/ or Catastrophic Weather Event including, but not limited to, the removal of damage, rubble, debris, and/ or Sedimentation from the Coral Reef.
Sedimentation means naturally occurring material that is broken down by processes of weathering and erosion and subsequently deposited on the Coral Reef.
Definitions of Additional Triggering Events
The definitions below are intended to be included in the above clauses to expand the Policy coverage to Coral Bleaching Events, Sedimentation Events and Human-Induced Events.
Bleaching Threshold means a surface temperature of [1]° Celsius above the maximum monthly mean temperature of the seas surrounding the Coral Reef.
Coral Bleaching Event occurs when surface temperature of the seas surrounding the Coral Reef reaches or crosses the Bleaching Threshold.
[Drafting note: Users of the clause may wish to take expert advice on coral bleaching, the causes of coral bleaching and bleaching thresholds to amplify the relevant definitions as required. For example, is coral bleaching caused by factors other than sea temperature rise and if so, which factors (e.g. extremely low tides, pollution, sunlight of high intensity) and to what extent. The authors of this clause considered that a more restrictive policy might impose a minimum period for bleaching before determining that a Coral Bleaching Event has occurred. For example, “the Bleaching Threshold must be met or exceeded for [3] consecutive days to amount to the Coral Bleaching Event”. The authors removed any such wording from this policy to align it with a higher climate ambition and best practice.]
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