Economic indicators of hydrologic drought insurance under water demand and climate change scenarios in a Brazilian context

Abstract

Developing countries face large losses to extreme natural hazards. Regarding droughts, planning instruments are important for managing water resources and diminishing the losses. Under increasing demand scenario, varied criteria should be incorporated indicating society's capacity to bear the consequences. Here we present a Brazilian-contextualized insurance model and suggest its outputs as complementary criteria to assist water resources management and to inform the stakeholders. From the streamflow simulated using hydrologic models driven by a climate scenario, we applied the Hydrologic Risk Transfer Model (MTRH-SHS), an insurance fund simulator under a multi-year policy, to assess sustainability indicators and the premiums a community would pay to cover the expenses of water deficits. Multiple scenarios generated with MTRH-SHS link water yield and seasonality related to both premium and loss ratios. A 20% increase in water demand elevates the premium up to 0.1% of a local GDP. Even under current demand, premiums may surpass 0.5% of GDP because of changes in the hydrologic regime. Proportionally, more seasonal or varied regimes result in more heterogeneous loss events, which in turn is linked to higher insurance premiums. MTRH-SHS might raise awareness for decision-makers to cope with drought under changing water demand and climate in the Brazilian context.