---
title: ensurance and your cost of capital
canonical_url: https://ensurance.app/guide/ensurance-and-your-cost-of-capital
markdown_url: https://ensurance.app/guide/ensurance-and-your-cost-of-capital.md
subtitle: "total cost of risk includes the charge your lenders and investors add, and what a funded protection could change"
category: nature-finance
---

# ensurance and your cost of capital

*total cost of risk includes the charge your lenders and investors add, and what a funded protection could change*

Your flood or fire risk is billed more than once. The insurer charges a premium. You keep the deductible and whatever the policy leaves out. The plant sits idle while the road is closed. Then a quieter charge arrives: your lender widens the spread, and your investors want a higher return to hold the same exposure. **Total cost of risk** adds those lines up. This post adds the lender's and investor's line.

Some of that exposure sits off your books: in the forest above the intake, the floodplain under the warehouse, the marsh in front of the port. Work on the site itself still matters. A healthy forest can slow a fire; a connected floodplain can spread the water before it reaches the dock. That land does its work whether or not anyone pays for it. Ensurance is built to let the people it protects pay for it. It is not the forest.

## what total cost of risk counts

Total cost of risk is everything a business pays, in a year, because a loss can happen: the insurance premium, the losses it keeps, the losses no policy covers, the downtime, and the risk charge its lenders and investors add, plus the cost of mitigation spread over its useful life.

| line | who charges it | what moves it |
|---|---|---|
| Premium | The carrier | Expected loss plus loads for expense, reinsurance and profit |
| Retained loss and deductibles | You | How often you keep a loss, and how large each one is |
| Uninsured and excluded loss | You | Perils, layers or sublimits the policy leaves out |
| Downtime | You and your customers | Days the plant, road or intake is down beyond what interruption cover pays |
| Risk charge on capital | Lenders and investors | Spread, covenants, tenor, collateral haircut, required return |
| Mitigation, annualized | You, or whoever funds it | Capital cost spread over its life, so it sits beside the annual lines |

:::johnson
**a risk charge prices the place. a funded protection is built to change it.** A wider spread can describe a degraded watershed accurately without putting anything into it.

[See how funding the source reads for lenders and investors →](/solutions/capital-providers?from=guide&topic=lower-the-loss)
:::

Two rules keep the sum honest. **Count each loss once:** a claim the carrier pays is already inside the premium line, so do not add it again. **Stay on one time basis:** every line is annual, so a ten-year mitigation project goes in as its annual cost, not its full price beside a one-year premium.

The premium leg has its own series. A Casualty Actuarial Society handout (2011) builds a catastrophe-exposed premium as expected loss and expense, plus the net cost of reinsurance, plus profit. [How to lower insurance premiums](/guide/how-to-lower-insurance-premiums?from=guide) takes that line apart, and [insurability is the first domino](/guide/insurability-is-the-first-domino?from=guide) covers what happens when the carrier leaves. The rest of this post is the line many worksheets leave blank: the price of capital.

## the lender's risk charge: expected loss

A lender prices risk with three numbers: **expected loss = PD × LGD × EAD**. **Probability of default (PD)** is the chance the borrower stops paying. **Loss given default (LGD)** is the share the lender loses if that happens, after it recovers the collateral. **Exposure at default (EAD)** is how much is owed at that point. Expected loss is the product of the three.

Physical risk can move all three. A plant that floods every few years earns less and pays its debt with less room, so PD rises. A warehouse on a floodplain or a timber stand in fire country is weaker collateral, so LGD rises. A borrower in trouble draws down a revolving facility before it defaults, so EAD rises. The lender answers with a wider spread, a shorter tenor, tighter covenants, a haircut on the collateral, or no loan.

An illustration, on round numbers and not a pricing model: a $20 million loan with a 2% probability of default and 45% loss given default carries expected loss of $180,000 a year. If repeated flooding moves PD to 2.5% and LGD to 50%, expected loss becomes $250,000. The $70,000 a year difference is about 35 basis points of the loan balance in expected loss. That measures expected loss, not the spread a lender would charge: a lender then adds a margin, funding cost and a charge for the capital it holds.

## the investor's risk charge: cash flows first, then a residual

Equity prices risk through the required return. A careful public treatment of physical and nature risk here comes from **The Landbanking Group (TLG)**, a Munich nature-finance company. Its April 2026 paper proposed a Nature Risk Premium added to the capital asset pricing model (CAPM). Its current page, read in October 2026, revised that.

TLG now calls the term a **Physical Risk Adjustment (PRA)**: required return = risk-free rate + beta × market premium + PRA. Estimable physical consequences go into expected cash flows first. The PRA covers only material physical risk that is still outside those cash flows and the baseline return, is borne by the holder in question, and is not already priced somewhere else. TLG calls its calibration "a judgemental shadow price — not an empirically estimated market premium." It also says the current evidence does not yet support calibrating a standalone market premium for physical risk. For credit, the same assessment informs PD, LGD, spreads, covenants and tenor where the evidence supports it.

That order is right, and it is worth copying: **put the loss in the cash flows first; price only what is left.**

The two numbers measure different things. For scale, the MSCI Institute's corporate risk survey reports a Bloomberg finding of about 22 basis points of weighted average cost of capital (WACC) for each 10% more physical-risk exposure. That is a market-wide figure, as reported, not the charge on any one site, and it says nothing about what happens when a site's risk falls.

## what could change when the source improves and stays improved

Say the forest above a company's water intake is thinned and kept that way, or a floodplain upstream of its plant is reconnected and held. In principle, three things move.

| channel | what changes | where it shows |
|---|---|---|
| Cash flows | Fewer days down, smaller retained losses, steadier input supply | Expected earnings and debt service, so PD |
| Collateral durability | The asset securing the loan is less likely to be damaged or stranded | LGD and the haircut |
| The residual | Less risk left outside the cash flows | A smaller PRA or credit adjustment |

"In principle" matters. Each step has to be **evidenced and then recognized**. The evidence is a physical mechanism (how the treatment changes fire spread or flood depth at this site), a hazard-to-loss model run with and without the work, and proof that the improvement lasts as long as the loan. Recognition is the lender's or investor's decision to count it. [How an intervention lowers the loss](/guide/how-an-intervention-lowers-the-loss?from=guide) walks through those steps.

Recognition is the hard part. Sarah Conway, a former Willis Towers Watson (WTW) ecosystem resilience lead, argues that markets can see a worsening exposure but struggle to see a loss that never happened. On the insurance side there is one well-known priced case: a wildfire policy for the Tahoe Donner association in California came in 39% cheaper, with an 89% lower deductible, than its sponsors' stated counterfactual without forest management (WTW and The Nature Conservancy, 2025). One placement, not a typical discount. We have not found a published case of a lender cutting a spread because an upstream ecosystem was funded. Proximity is not protection, either: a wetland nearby does not by itself show that one borrower's loss falls.

## a risk charge is a symptom; a funded protection is the response

Applied alone, a higher cost of capital can steer money away from the place that most needs funding. [Pricing nature risk is a symptom, not a cure](/guide/pricing-nature-risk-symptom-not-cure?from=guide) makes the longer case, and [what nature value at risk actually measures](/guide/what-nature-value-at-risk-actually-measures?from=guide) explains the other numbers in this field.

A risk signal can lead to engineered defenses, more insurance, operational changes, moving, or funding the source. The last is the one aimed at the source itself. Ensurance is built to be that response for a named source: the forest, floodplain or marsh behind a specific bill, paid for by the people whose losses it is meant to lower, each against its own avoided loss. [What is a serviceshed](/guide/what-is-a-serviceshed?from=guide) shows how that payor list is drawn, and [the premium went next door](/guide/the-premium-went-next-door?from=guide) shows where the value of a protecting forest already lands in other people's asset prices.

To be fair to TLG: pricing the risk is not all it does. Its **Nature Equity** work proposes outcome-based contracts that pay land stewards for measured preservation or uplift, and its SEKEM and EBDA case study reports purchases of measured improvements with proceeds going to farmers. The line between pricing nature and paying for it does not run between TLG and us.

Ensurance has not lowered anyone's cost of capital; no ensurance saving has been realized yet. [What ensurance cannot do](/guide/what-ensurance-cannot-do?from=guide) sets out the limits: it does not pay claims or replace a policy.

## if you hold the risk

For a lender, an investor or a company with a site it cannot move:

1. **Write total cost of risk as one annual table**, every line above, each loss counted once.
2. **Find the source behind the largest line.** For some losses it can be upstream or offshore of the asset, not on it.
3. **Ask your lender or risk model what it would need to see**: the mechanism, the with-and-without model, the monitoring, and the term the improvement has to last.
4. **Put the protection's annual cost beside the annual lines it could lower**, on the same time basis. [The quote beside the cost of doing nothing](/guide/the-quote-beside-the-cost-of-doing-nothing?from=guide) shows the arithmetic.

If you would finance the land that holds a protection, [the land is the collateral](/guide/the-land-is-the-collateral?from=guide) covers how a capital provider can hold the deed as security. Pages for [investors](/solutions/investors?from=guide&topic=lower-the-loss), [capital providers](/solutions/capital-providers?from=guide&topic=lower-the-loss) and [corporations](/solutions/corporations?from=guide&topic=lower-the-loss) describe what we are building and offering. To talk through a specific site, [start a conversation](/contact?from=guide&topic=lower-the-loss).

This post is not insurance, legal, tax or investment advice.

## frequently asked questions

### what is total cost of risk?

Total cost of risk is the full annual cost of carrying a risk: insurance premiums, retained losses and deductibles, uninsured and excluded losses, downtime, and the risk charge lenders and investors add to the same exposure, plus mitigation spread over its life. Each loss is counted once, and every line is on the same annual basis.

### does a healthier ecosystem lower my cost of capital?

It can in principle, through steadier cash flows, more durable collateral and less residual risk. It does so only when the improvement is measured, modeled against a without-project case, lasts for the term, and the lender or investor recognizes it. We have not found a published case of a lender cutting a spread for a funded upstream ecosystem.

### what is a physical risk adjustment?

It is The Landbanking Group's term for a holder-specific addition to the required return. It covers only material physical risk left outside expected cash flows and not priced elsewhere. TLG describes it as a judgemental shadow price, not an empirically estimated market premium.

### is ensurance a way to lower my interest rate?

Not today. Ensurance is built to fund the natural asset that lowers a named loss. Whether a lender prices that lower loss into a loan is the lender's decision, and no ensurance saving has been realized yet. If you want this tested on a specific site, [talk to someone who can map it](/contact?from=guide&topic=lower-the-loss).

## sources

[The Landbanking Group, physical risk pricing](https://www.thelandbankinggroup.com/physical-risk-pricing) — Current Physical Risk Adjustment page (read October 2026): Cash flows first, a judgemental shadow price for the residual; the April 2026 paper proposed a Nature Risk Premium

[The Landbanking Group, Nature Equity consultation paper](https://www.thelandbankinggroup.com/nature-equity-consultation-paper) — Outcome-based payments to stewards for measured preservation or uplift

[The Landbanking Group, SEKEM and EBDA case study](https://www.thelandbankinggroup.com/case-study/sekem-and-ebda) — Purchases of measured natural-capital improvements, with proceeds to farmers

[MSCI Institute, corporate risk survey (December 2025)](https://www.msci-institute.com/wp-content/uploads/2025/12/MSI-Corporate-Risk-Survey-231225.pdf) — Reports a Bloomberg finding of about 22 basis points of WACC per 10% more physical-risk exposure, as reported

[Casualty Actuarial Society, ratemaking seminar handout (2011)](https://casact.org/sites/default/files/presentation/rpm_2011_handouts_ws1-jabben.pdf) — Premium as expected loss and expense, plus net cost of reinsurance, plus profit

[Sarah Conway, why risk reduction rarely lowers insurance premiums or the cost of capital](https://riskandresilienceledger.substack.com/p/why-risk-reduction-rarely-lowers) — Why markets price measurable exposure more readily than avoided loss

[WTW, first-of-its-kind wildfire resilience insurance (April 2025)](https://www.wtwco.com/en-cm/news/2025/04/willis-and-the-nature-conservancy-launch-first-of-its-kind-wildfire-resilience-insurance) and [The Nature Conservancy](https://www.nature.org/en-us/newsroom/ca-wildfire-resilience-insurance0/) — Tahoe Donner: premium 39% and deductible 89% lower than the sponsors' stated counterfactual

## the series

1. [how to save money with ensurance](/guide/how-to-save-money-with-ensurance?from=guide)
2. [what ensurance saves you: the four bills](/guide/what-ensurance-saves-you?from=guide)
3. [how an intervention lowers the loss](/guide/how-an-intervention-lowers-the-loss?from=guide)
4. [the quote beside the cost of doing nothing](/guide/the-quote-beside-the-cost-of-doing-nothing?from=guide)
5. [ensurance and your cost of capital](/guide/ensurance-and-your-cost-of-capital?from=guide) (this post)
6. [split the bill for what lowers it](/guide/split-the-bill-for-what-lowers-it?from=guide)

Sister hub: [how to lower insurance premiums](/guide/how-to-lower-insurance-premiums?from=guide). Also: [how to make money with ensurance](/guide/how-to-make-money-with-ensurance?from=guide).