Insurance value of natural capital

Nature-based solutions to insurance are in high demand. We explore the idea that natural capital has an insurance value insofar as it can mitigate the effects of uncertainty on human well-being. We present a formal model that substantiates this claim. We propose a definition for the insurance value of natural capital for a stochastic and dynamic ecosystem that provides ecosystem services for a risk-averse user. The insurance value of natural capital depends on the properties of ecosystem dynamics as well as on the risk and time preferences of the ecosystem user. It can be positive or negative. We relate the natural insurance value to conservative use of the ecosystem and precautionary investment in the natural capital stock. For the case of logarithmic per-period utility we find that optimal management becomes more conservative with increasing uncertainty if and only if the insurance value of natural capital is positive. We qualify this finding for more general forms of the per-period utility function.