Supporting carbon storage in China

Mark Maroon:

Welcome to Climate Check. This is Mark Maroon, Vice President at American Modern, a Munich Re Company. And today I am joined by Benny Zhou, head of agriculture and actuary Non-Life Greater China at Munich Re. Benny, thank you so much for joining me today.

Benny Zhou,:

Thank you, Mark. It's my pleasure to be here.

Mark Maroon:

So can you just tell me a little bit about yourself and your role with Munich Re?

Benny Zhou,:

Yeah, sure. I'm actually heading up the Agro Reinsurance operation in Munich Re for Greater China. We are the reinsurance provider to the direct insurers in China market, which actually provide protection to farmers in the crop business and livestock business.

As you know, the agriculture segment can be very volatile. Agriculture could be easily subject to the heavy losses from the natural catastrophe events, severe weather events, and also pandemics in livestocks. And this actually creates the financial stress for the farmers, which normally have relatively lower income. Our function is providing the reinsurance post to smoothing their financial stress and so that they can continue to operate in the agriculture business.

Mark Maroon:

Thank you very much for that introduction. So one of the big things that we want to talk a little bit today was following up on some of our previous conversations that we had in our podcast series. We were discussing the People's Republic of China pledging to ensure that its carbon emissions would peak by 2030. So can you talk a little bit about how carbon storage fits into China's plan?

Benny Zhou,:

As we all know, the climate change has been one of the greatest challenge these days for us global wide, same to China. The climate change has caused devastating damages to our environments, including more severe natural catastrophe events such as droughts, excessive heat in the summer, flood, typhoon, as such. As this year, we all can see the droughts happen in Brazil, Central Europe, Southwest Europe, and Yangtze River Basin in China has caused significant adverse impacts to crop yield.

To deal with these challenges, governments around the world have working closely in making policies and setting up targets, including Chinese government. Chinese government has announced 2030, 2060 targets. Meaning that 2030 China will reach carbon peak and 2060 China will reach carbon neutrality.

Now, in order to achieve these targets, many actions has been put in place. So including well-known restructuring of energy resources from fossil fuel to more clean energies. Such as solar and wind, and also developing the new technologies in CCUS, carbon capture, utilization, and storage.

So however, natural climate solution have catching increasing attentions from government. NCS, which means the conserve, restore, and manage forest grassland, wetland and agricultural land, to increase carbon storage and reduce greenhouse gas emission. It's a critical part of all different measurements in terms of dealing with climate change.

According to some research, NCS can contribute 37% of CO2 equivalent mitigation to climate between now and 2030. And every year it can contribute 11 gig town CO2 emission equivalent. To be put in a simple way, our natural ecosystem is a very, very strong carbon storage system and which has been existing for millions of years. And it has a cost-effective benefits compared to other approaches.

Some studies shows that for per ton of CO2 equivalent mitigation, the cost from NCS is below 100 US dollars, which is less than 20% of other common known approaches. Such as using electric vehicles, such as using the solar photo take technologies.

Grassland is a very important part, only second to forestry in NCS, in order to store carbon in our natural ecosystem. It covers roughly about 25% of the Earth's surface and contained 12% of terrestrial carbon stocks. So in China is very similar. In China, less 40% of the Earth's services covered by grassland. At Inner Mongolia is in the northern part of China, which has more than 80% of land covered by grassland.

In the past decade, the government have been working very hard together with farmers, in order to improve the management of grassland. And also improve the grassland management and also avoid overgrazing, which actually make a great contribution to our ecosystem in terms of store more carbon and improve the environment. Under the climate change topic, the government would like to look into further into the eco value of this grassland making contribution to climate change.

Mark Maroon:

So what are the risks that must be managed or transferred to allow initiatives like the Mongolian Carbon Storage Project to proceed?

Benny Zhou,:

The NCS projects like planting forestry, normally it's a very long-term project and this project can last for 20 years and 40 years. As you know, the trees needs time to grow. And throughout the growing process, they actually absorb CO2 from our atmosphere, which is of course is benefit to dealing with our climate change.

Now considering a long-term perspective of these projects, there have been quite a variety of risks involved in these projects. For example, there are certain categories. For example, the project management risks, the external risks, the financial risks, and the natural disturbance risks.

To be more specific, in the project management risks, it could be failed to implement according to product development process. Or insufficient training in technical capacity of workers. Or lack of technical equipment or planning materials. For external risks, it could be a change of land usage, change of land ownership, or change of the government policy.

For financial risks, it could be a discontinue of investment, lack of fund as such. But what's also more important is the natural disturbance risks. The natural hazards like typhoon, flood, extreme heat of forest, or mud slides, or most commonly seen the fire, could have a significant damage to these projects.

So if we want to have these projects run successfully, we have to manage these risks carefully and in a professional way. And of course, and also risk transfer in order to get the financial compensation when the adverse events happens.

Munich Re has proven expertise in these areas. We have proven expertise in risk identification, risk analysis, quantification monitoring, risk transfer. And all of our expertise will help these NCS projects to have better risk management to mitigate their risks, to be able to be more resilient to the natural disasters events.

And at the end, this is going to enable the scalability of these NCS projects. So that being in the insurance and reinsurance industry, we can make our contribution to make this NCS projects develop faster, more resilience. And as well as making its own contribution to the overall climate change strategies and actions that we are taking global wide.

Mark Maroon:

So I guess I would follow up then, what are some of the ways that organizations like MUNICHRE and the industry go beyond the role of your traditional insurer or reinsurer to provide some more expertise or guidance or encouragement of natural climate solutions?

Benny Zhou,:

Risk solutions for the NCS activities are still at a very early stage of development in China. Structuring and pricing insurance offerings remains a challenge for industry for the time being, as it requires a holistic understanding of all factors and stakeholders offerings around the value chain.

Because this is very new, so we take an example, which is the product we developed for Inner Mongolia Grassland, and using satellite remote sensing index parametric as a insurance cover. So in Inner Mongolia, there's multiple risks actually imposed to a grassland. Including particularly the severe weather events such as droughts, flood, and also potentially overgrazing activities coming back again.

So Munich Re work together with the local industry, with the local forestry and grassland administration experts in the carbon quantification and satellite remote sensing data providers. Now the whole process is to evaluate the losses of the carbon storage in the grassland due to adverse events happen to them.

So the estimation of the carbon storage is the key of these products. And also understanding the multiple risks impacts in a quantifiable way to this carbon storage is also what we have done together with the local experts.

The challenge to design a insurance product for grassland is grassland is very large and is almost impossible for traditional loss assessment. So we actually turned to satellite remote sensing technology. The benefits of satellite remote sensing technologies, it's a result-oriented evaluation. It covers multiple parallels. And it can also monitor large areas.

And loss adjustment could be easy and quick. And as well as the payment structure could be designed in a fast payment way. So the local government and farmers can get the financial compensation once an adverse event happens and they can quickly use the fund to restore the grassland. Now of course, under the satellite remote sensing, we choose a index which is called MPP net primary production.

Net Primary production is a index which describe the net flow of the carbon from atmosphere into bring plan per unit time. So we actually started last 20 years data and evaluate the benchmark of the MPP index, which can describe the carbon storage in the grassland. And in the risk period, if the monitored MPP turns out to be lower than a benchmark MPP and the claims could be triggered.

In this process, that's a lot more party have been involved. Including the government, including the local industry, including the research institution experts in carbon storage and new startup companies. So Munich Re, in these pilot products, we go beyond the traditional risk carrier. We actually integrate all different part of resources together. So we can design this first of kind product in China.

After we launch the products, they actually immediately attract keen interest from the market. We received inquiries from different insurance companies. We received inquiries from the NCS project owners. And looking into more potential products which can serve their needs and which can improve their risk management and improve their risk transfer in the NCS projects.

Mark Maroon:

Thanks. And one of the things I want to maybe follow up on real quick is you had briefly mentioned sort of this concept of parametric cover. So could you maybe just explain to everyone what that means? And maybe what an indemnity trigger is that you'd be using to potentially trigger this?

Benny Zhou,:

In the insurance area, normally the dominant part of the products are indemnity basis. So the idea is basically to evaluate the losses, the actual losses, and make payment based on the actual losses. But of course, this kind of products has the job back, is normally, it takes quite a long time to finish the whole process. And which actually slow down the financial compensation to the insurer, which suffer losses under adverse events.

But for parametric, it definitely had advantage of covering multi-perils and covering very large area. And it can make the loss payment happen much quicker than indemnity basis. But of course for the NCS project, most of the projects involved natural objects such as forest and grasslands. And these natural objects in many of the cases, are very difficult to evaluate and assess on the ground basis.

For example, forest areas. Some of the forest could be located in very remote areas and in these areas it's not accessible for human being or even by transportation. And so by using the satellites which actually monitor the situation on the regular basis, it could be on a daily basis or weekly basis. And this information could be accumulated and form series of datas for people to analyze and monitor the situation.

And if there's any perils happen. For example, like fire or flood or typhoon happens, and if it damage to the forest or grassland, we can use satellite remote sensing to make the analysis and evaluate the losses in a very timely way.

Mark Maroon:

It's pretty cool that we are using this kind of technology to really help compensate people pretty much on the spot these days. Right? And people accuse of the insurance industry of being boring sometimes, but when you really get into the weeds on some of it, it actually is pretty interesting. Benny, thank you so much for your time today. We really appreciate you joining us.

Benny Zhou,:

Okay, thanks. My pleasure.

Mark Maroon:

And, listeners, if you like this episode, please subscribe to our podcast for easy access to past and future episodes of Climate Check. For more information, as always, go check out munichre.com/climate. And we will see you next time.