How can natural selection occur at species level whilst not occuring at the individual level?
I think you have misunderstood the passage. Here is a larger section (found at google books):


  Natural selection can also occur at the level of species, for certain characteristics enhance the rate of origin of new species or diminish the likelihood of species extinction. For instance, the number of species in lineages of herbivorous insects has generally increased faster than in closely related lineages that have other feeding habits. Neither gene selection nor species selection has molded the advantageous characteristics of individual organisms; rather, they have affected properties at the gene level or at the species level. But individual selection, selection among individual organisms within populations, is at the center of evolutionary theory. It is at this level that selection explains most of the adaptive features of organisms.


Going through this part-by-part; the first two sentences state that lineage/species selection can occur, in the sense that species traits can enhance the speciation rate of a lineage or decrease their risk of extinction, relative to other lineages (e.g. in herbivorous insects). 

He is then saying that the traits that are the target of this selection are not traits of individuals but traits/properties of the species/lineage. 

An example might help to explain the point. For instance, it has been argued that pelagic larvae in sessile ocean species will lead to higher dispersal rates, which means that species can colonize new environments, and this can lead to speciation through adaptive radiation (Jablonski &amp; Hunt, 2006). A larger range will also correspond to lower extinction rates (everything else equal). The trait might also be fixed within a lineage (so there is no variance at the individual level within-species), and if so, this lineage as a whole could have higher speciation rates and lower extinction rates compared to a sister lineage that lacks pelagic larvae. 

The individuals within species will naturally have the underlying traits (pelagic larvae), but the traits that are selected at the lineage level (extinction risk &amp; speciation rate) are not properties of individuals but are traits of the lineage/species. 

He then ends by continuing with "normal" individual selection, and states that processes at this level is responsible for most adaptive features of organisms. It should also be noted that lineage selection is still considered controversial, and it has been shown that it is inherently much weaker than selection at the individual level. Personally, I think there are some very good examples of how species/lineage selection can function, but to what extent it is an important process for species and organisms is an open empirical question. If you are interested to look further, Jablonski (2008) and Okasha (2007) are two good starting points.