Abstract
The increasing frequency and severity of natural catastrophes due to climate change is expected to cause higher natural disaster losses in the future. Reinsurance companies bear a large share of this risk in the form of excess-of-loss coverage, where they underwrite the most extreme portion of insurers’ risk portfolios. Past experience has shown that after a very large natural disaster, or multiple disasters in close succession, the recapitalization need of reinsurers could trigger a “hard” reinsurance capital market, where a high demand for capital increases the price charged by investors, which is opposed to a “soft” market, where there is a high availability of capital for reinsurers. Consequently, the rising costs of underwriting are transferred to insurers, which ultimately could trigger higher premiums for natural catastrophe (NatCat) insurance worldwide. Here, we study the vulnerability of riverine flood insurance systems in the EU to global reinsurance market conditions and climate change. To do so, we apply the “Dynamic Integrated Flood Insurance” (DIFI) model, and compare insurance premiums, unaffordability, and the uptake for soft and hard reinsurance market conditions under an average and extreme scenario of climate change. We find that a rising average and higher variance of flood risk towards the end of the century can increase flood insurance premiums and cause higher premium volatility resulting from global reinsurance market conditions. Under a “mild” scenario of climate change, the projected yearly premiums for EU countries, combined, are €1380 higher under a hard compared to a soft reinsurance capital market in 2080. For a high-end climate change scenario, this difference becomes €3220. The rise in premiums causes problems with the unaffordability of flood coverage and results in a declining demand for flood insurance, which increases the financial vulnerability of households to flooding. A proposed solution is to introduce government reinsurance for flood risk, as governments can often provide cheaper reinsurance coverage and are less subject to the volatility of the capital markets.
Highlights
Climate change will increase the frequency and severity of natural catastrophes [1], causing direct damage to built environments and agricultural land, as well as indirect economic impacts, throughAtmosphere 2020, 11, 146; doi:10.3390/atmos11020146 www.mdpi.com/journal/atmosphereAtmosphere 2020, 11, 146 trade- and supply-chain disruptions, lower productivity, and loss of income [2]
Premiums for insurance against natural disasters are expected to rise in the future as a result of climate change [6], which can cause it to become unaffordable for certain population groups, or it can exceed the willingness-to-pay for insurance
We show the output for two projections of climate- and socio-economic change: namely, RCP4.5-SSP2, which is roughly aligned with a 2-degree Celsius temperature rise and an average socio-economic development worldwide [44], as well as RCP8.5-SSP5, which is a high-end pathway for greenhouse gas emissions due to a high reliance on fossil fuels and high socio-economic growth [45]
Summary
Climate change will increase the frequency and severity of natural catastrophes [1], causing direct damage to built environments and agricultural land, as well as indirect economic impacts, throughAtmosphere 2020, 11, 146; doi:10.3390/atmos11020146 www.mdpi.com/journal/atmosphereAtmosphere 2020, 11, 146 trade- and supply-chain disruptions, lower productivity, and loss of income [2]. Climate change will increase the frequency and severity of natural catastrophes [1], causing direct damage to built environments and agricultural land, as well as indirect economic impacts, through. Premiums for insurance against natural disasters are expected to rise in the future as a result of climate change [6], which can cause it to become unaffordable for certain population groups, or it can exceed the willingness-to-pay for insurance. This means that insurance uptake can decline in markets where purchasing flood coverage is optional. It is important to assess under which conditions insurance premiums are affected by climate change and to understand how to limit potential increases in premiums
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