Recommendations for integrating NbS in insurance schemes based on the synthesized and improved catastrophe models and other methods and empirical evidence base

This deliverable provides a set of recommendations to mainstream investment in Nature-based Solutions (NBS) for climate risk reduction and how insurance may contribute to the scaling up of NbS. These recommendations are a result of the improved methods developed during the previous deliverables of the Naturance project (D4.1, D4.2) and the Innovation Labs from WP2 of NATURANCE. We combined the output of a newly developed flood risk model and a Discrete Choice Experiment for monetizing NBS co-benefits to conduct a societal Cost-Benefit Analysis (CBA) applied to different NBS options in the Netherlands. Additionally, we perform an analysis on how these NBS policies can impact insurance premiums and insurance demand. Moreover, we explore how insurance may contribute to investment in NbS or stimulate the implementation of NBS by their policyholders. Together, these components demonstrate the economic feasibility of NBS, and the role insurance can play in stimulating  NbS.

The deliverable first synthesizes the progress on developing shared metrics and standards to evaluate NBS performance. These metrics provide a foundation for assessing effectiveness, transparency and comparability across projects. Standardization is critical to ensure that insurers and policymakers can quantify the contribution of NBS to risk reduction or other societal issues. Building on this, an overview of financial instruments that can enable NBS investment is presented. These instruments were identified through a literature review and discussed with experts in an Innovation Lab (WP2). The Lab discussion highlighted the importance of blended finance structures and stronger policy alignment to attract private capital for NBS. Public-Private Partnerships (PPP) were ranked as the best instrument to mainstream investment in NBS among participants. The labs emphasized that while grants and public funding remain essential to initiate projects, private participation is key for scaling NBS implementation and ensuring long-term sustainability. This is complemented by a discussion regarding Biodiversity Net Gain (BNG) policy, which was discussed in another WP2 Innovation Lab, by focusing on several case studies.

Then, the focus of the deliverable shifts to the case study of the European Floods of 2021, introduced in Deliverable 4.2, which highlighted the need for an improved flood risk management strategy.. We present results of a CBA that compares different NBS scenarios to assess the economic feasibility of NBS for flood risk reduction over time, accounting for risk reduction benefits and societal co-benefits based on the improved methods and metrics designed in WP4. The results highlight how neglecting co-benefits in the CBA can reduce the viability of NBS, particularly when these require a large number of hectares of land. New alternatives that do not require purchasing the land or where a combination of risk reduction NBS and farming activities can be conducted on the same land, could be viable solutions to solve this issue and increase acceptance from the community. This is in line with the concerns which were raised during the WP2 Innovation Lab sessions, where local stakeholders highlighted land use as the main obstacle, which was later confirmed in the Discrete Choice Experiment results.

An integration of the effects of NBS on flood risk reduction in the Dynamic Integrated Flood Insurance (DIFI) model shows that, as a result of the effectiveness of NBS in reducing expected annual damage as shown in the flood risk model, the percentage of uninsured risk (coverage gap) would drop by almost 50%. Moreover, our results demonstrate that investment in NBS by insurance can be a viable business case under the condition of a public or public-private flood insurance arrangement.  The last section looks into an alternative way for insurance to incentivize NBS adoption by their policyholders through premium discounts and shows that insurance-based incentives are an effective way of promoting green roof adoption. Overall, this deliverable aims to provide a comprehensive assessment of the benefits and costs of NBS, in order to inform policymakers and private sector investors about how they perform in different scenarios. The results of our improved methods and metrics in WP4 underscore the effectiveness of NBS from a societal perspective and the need for collaboration between public and private partners to mainstream investment in NBS that reduce climate risk.

The key recommendations for the scaling up of investment in NBS for the public and private sector are:

●       Employ shared metrics and standards to allow for comparability of the effectiveness and desirability of NBS. The metrics proposed in this report allow an assessment on a broad welfare perspective.

●       Enable collaborations between the public sector and the private sector in order to collect, analyse, and share relevant data, incorporating relevant indicators and metrics. Alternatively, the public sector can collect open-access data.

●       Integrate NBS in spatially detailed catastrophe models that can provide actionable insights into risk reduction, premiums and insurability.

●       Assessing flood-risk reduction of NBS requires basin-scale simulations to capture upstream and downstream interactions.

●       Stimulating private finance for NBS is dependent on the type of insurance system. In the case of a public-private insurance system, there can be a business case for insurers to invest in NBS for risk reduction.

●       Even in the case of a purely public or private system, the assessment of risk-reduction from NBS is still relevant to identify the beneficiaries.

●       Complement the risk-reduction estimates with a co-benefits assessment. Monetizing co-benefits in a societal cost-benefit analysis is key to illustrate the economic viability of NBS.

●       Account for land-use change as a key component of financial feasibility of NBS. Its financial and social impact should not be neglected by policymakers. Innovative solutions that combine agricultural practices and NBS could increase viability and social acceptance.

●       Promote alternative insurance financing mechanisms, such as premium-based incentives for insurance policyholders to adopt NBS.

●       Consider private-public partnerships, grants, and insurance schemes as they play central roles in de-risking and legitimising investments, but could be complemented by payment for ecosystem services, territorial branding, biodiversity credits, or community financing to secure local buy-in and diversified revenue streams.

●       Implement public policies, such as the Biodiversity Net Gain in the UK, as a potential way for enabling NBS. The insurance sector plays a key role in helping developers and environmental consultants mitigate potential liabilities arising from Biodiversity Net Gain projects.