Climate Change

First parametric carbon storage insurance launched in Mongolian Grasslands in China

Moving beyond the role of reinsurer to deliver innovative solutions

03.08.2022

As one of the most important Natural Climate Solutions (NCS), grasslands cover nearly one-third of the Earth's land surface. They are globally recognized for their high biodiversity and ecological value in terms of carbon sequestration and storage and erosion control, helping to maintain overall climate stability. 

To limit global warming to the levels of the 2015 Paris Agreement, net global emissions of greenhouse gases must fall to zero by 2050. In this context, it is essential to maintain carbon sequestration in all landscapes, including grasslands, to keep global warming at a certain level in the long term. The (re)insurance industry, with its risk transfer and management solutions, is considered to play an important role in reducing carbon emissions. 

Munich Re's Greater China Agro team recently helped a local insurer introduce the first parametric insurance policy for carbon storage on grasslands in Inner Mongolia, using satellite remote sensing (SRS) technology. Here we explain why and how the innovative solution was successfully launched by redefining the role of the reinsurer in product development and leveraging Munich Re's risk expertise to help the market manage complex new risks with robust solutions.

Beyond reinsurance - a journey along the entire carbon value chain

Inner Mongolia has 87 million hectares of natural grasslands that are an integral part of the Eurasian Steppe - the largest contiguous ecosystem in the world. The vast size of the grasslands makes them an important storehouse of carbon. Similar to other grasslands around the world, the Mongolian Grasslands face the risks of intensifying natural disasters, desertification, and overgrazing. This is leading to a rapid loss of CO2 absorption capacity. With the introduction of the Chinese government's "2030/60 carbon targets", there is an increasing demand in the market for carbon sequestration technologies and risk management solutions for the emerging carbon industry. To address the complex risk scenarios facing grassland carbon sequestration, Munich Re Greater China's Agro team has partnered with Capital Partners' Weather & Agro unit and one of the leading local property insurers - China Pacific Property Insurance Co. Ltd. Together, they provide consulting services on the use of key grassland carbon pools, associated methodology, carbon trading information, determining the coverage amount, structuring the payout, setting deductibles and pricing. This evolved into the launch of the first parametric SRS index insurance for grassland carbon storage in Lucheng, Inner Mongolia, in early 2022. As one of the innovative solutions under the NCS, the product is the first of its kind, which immediately attracted keen interest from the market.

Remote sensing by satellite enables continuous monitoring of the condition of grasslands, making it an important tool for surveillance and inventory of carbon storage in grassland ecosystems. The insurance product uses this technology for ecological assessment of grasslands and is then triggered based on the remote sensing index NPP (net primary productivity), a key variable for determining carbon cycling in grassland ecosystems. 

With the development of risk solutions for carbon-related activities still in its infancy in China, structuring and pricing insurance offers remains a challenge for the industry for now. This is because it requires a holistic understanding of all factors and stakeholders along the entire value chain. The successful joint launch of this parametric product with the primary insurer shows that Munich Re's role in this innovative field goes far beyond that of a pure risk carrier. We supported the entire product development process and provided additional training and consulting services to the client. 

Throughout the process, the Agro team proactively interacted closely with local industry, research institutions, the National Forestry and Grassland Administration, experts in the field of carbon storage, and satellite operators to consider regulatory compliance, government requirements and standards, methodologies, and the latest technologies. With this expertise, the team identified industry risks and needs, raised risk awareness, and promoted solutions as opinion leaders to clients and the public. As a result, Munich Re Greater China has created a unique and forward-looking USP among its competitors in Greater China.

parametric-carbon-storage-collab-circle © Munich Re

Natural climate solutions - a new way of thinking to tackle climate change

Climate change, as one of the core challenges facing humanity, poses challenges for reinsurers. It is not just a question of how to manage it with our traditional approach to risk, but also a systematic change in mindset, where we see the environmental requirements we face as an opportunity to improve business models and operations. In China, the market for climate solutions has the potential to become a trillion-dollar market in the long term.

Natural Climate Solutions (NCS) are increasingly recognized as important levers for mitigating the negative impacts of climate change and promoting ecosystem resilience. These include ecosystem conservation, restoration, and management measures that increase carbon storage capacity and/or avoid greenhouse gas emissions. The implementation of innovative parametric grassland solutions is a successful best practice under NCS and is supported by us with global expertise and a local team. Munich Re has been taking a leading role in the fight against climate change for decades. In order to contribute to innovative solutions under NCS, Munich Re's Greater China Agro Team has also been actively exploring natural climate change mitigation solutions to expand climate risk insurability and strengthen Munich Re's ESG position in the China insurance market through long-term commitment and professional efforts with our credible expertise.

Contacts
Benny Zhou
Head of Agriculture & Actuarial Dept, GC NL
Greater China
Lydia Pei
Agro Client/Marketing Underwriter, GC NL
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