Abstract
Flood insurance coverage can enhance financial resilience of households to changing flood risk caused by climate change. However, income inequalities imply that not all households can afford flood insurance. The uptake of flood insurance in voluntary markets may decline when flood risk increases as a result of climate change. This increase in flood risk may cause substantially higher risk-based insurance premiums, reduce the willingness to purchase flood insurance, and worsen problems with the unaffordability of coverage for low-income households. A socio-economic tipping-point can occur when the functioning of a formal flood insurance system is hampered by diminishing demand for coverage. In this study, we examine whether such a tipping-point can occur in Europe for current flood insurance systems under different trends in future flood risk caused by climate and socio-economic change. This analysis gives insights into regional inequalities concerning the ability to continue to use flood insurance as an instrument to adapt to changing flood risk. For this study, we adapt the “Dynamic Integrated Flood and Insurance” (DIFI) model by integrating new flood risk simulations in the model that enable examining impacts from various scenarios of climate and socio-economic change on flood insurance premiums and consumer demand. Our results show rising unaffordability and declining demand for flood insurance across scenarios towards 2080. Under a high climate change scenario, simulations show the occurrence of a socio-economic tipping-point in several regions, where insurance uptake almost disappears. A tipping-point and related inequalities in the ability to use flood insurance as an adaptation instrument can be mitigated by introducing reforms of flood insurance arrangements.
Highlights
Due to climate change, natural catastrophes such as flooding are likely to increase in frequency and severity in the future [1]
RCP8.5-SSP3 shows the highest number of tipping-point regions, as the high premium increase and low economic growth under this scenario is already shown to lead to the increase of unaffordability of insurance compared to other scenarios
This study showed the possibility of a climate-induced socio-economic tipping-point for flood insurance in Europe, where rising unaffordability and declining uptake of insurance under climate change obstructs the functioning of insurance markets in high-risk areas
Summary
Natural catastrophes such as flooding are likely to increase in frequency and severity in the future [1]. The result is a widening divergence between what households are willing to pay for insurance, based on their subjectively perceived threat of flooding, and what insurers must charge to remain in business [14] This is a recognized issue regarding natural disaster insurance demand, because individuals tend to underestimate risk of events that occur with a low probability, but cause high damage, as is the case for flood risk [15]. The objective of this study is to identify areas where the functioning of (regional) private flood insurance markets could be hampered by rising unaffordability and declining demand for flood insurance, and to assess under which conditions of climate- and socio-economic change this occurs. Of the paper, the modelling approach will be explained, after which the results are presented, and a conclusion is given including policy recommendations
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