Impacts of climate change and remote natural catastrophes on EU flood insurance markets: An analysis of soft and hard reinsurance markets for flood coverage

Max Tesselaar; W. J.Wouter Botzen; Jeroen C.J.H. Aerts

doi:10.3390/atmos11020146

Impacts of climate change and remote natural catastrophes on EU flood insurance markets: An analysis of soft and hard reinsurance markets for flood coverage

Max Tesselaar^*
, W. J.Wouter Botzen
, Jeroen C.J.H. Aerts

^*Corresponding author for this work

Research output: Contribution to Journal › Article › Academic › peer-review

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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.

Original language	English
Article number	146
Pages (from-to)	1-19
Number of pages	19
Journal	Atmosphere
Volume	11
Issue number	2
Early online date	29 Jan 2020
DOIs	https://doi.org/10.3390/atmos11020146 https://doi.org/10.3390/atmos11020146
Publication status	Published - 29 Jan 2020

Funding

Funding: We thank the Netherlands Organization for Scientific Research (NWO), and the EU Horizon 2020-project RECEIPT for funding this research (NWO: VICI grant no. 453.14.006 & VIDI grant no. 452.14.005; RECEIPT grant no. 820712). T., W.J.W.-B., and J,-C.J.H.A.; supervision, W.J.W.-B., and J,-C.J.H.A.; writing-original draft, M.-T.; writing-1. review and editing, M.-T., W.J.W.-B. and J,-C.J.H.A.; funding acquisition, W.J.W.-B. and J,-C.J.H.A. All authors haPvlaet trneeard, Gan.Kda. ;gArelleedn ,toS .tKh.e;peutballi.shMeadn vaegrisnigonth oefR tihseks mOafnEuxstcrermipet.Events and Disasters to Advance Climate Change Adaptation: Special Report of the Intergovernmental Panel on Climate Change; Cambridge University Press: Funding: We thank the Netherlands Organization for Scientific Research (NWO), and the EU Horizon 2020-project RECEIPT for funding this research (NWO: VICI grant no. 453.14.006 & VIDI grant no. 452.14.005; 2. Hallegatte, S. The Indirect Cost of Natural Disasters and an Economic Definition of Macroeconomic Resilience. Policy Res. Work. Pap. 2015, 7357, 1–38. Conflicts of Interest: The authors declare no conflicts of interest. 3. Meier, U.B.; François Outreville, J. Business cycles in insurance and reinsurance: The case of France, Germany

Funders	Funder number
???publication-publication-funding-organisation-not-added???	452-14-005
EU Horizon 2020-project RECEIPT	453.14.006
Horizon 2020 Framework Programme	820712

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 13 Climate Action

Keywords

Capital markets
Climate change
Flood (re)insurance
Market penetration
Remote impacts
Unaffordability
Vulnerability

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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.",

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AB - 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.

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KW - Market penetration

KW - Remote impacts

KW - Unaffordability

KW - Vulnerability

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Impacts of climate change and remote natural catastrophes on EU flood insurance markets: An analysis of soft and hard reinsurance markets for flood coverage

Abstract

Funding

UN SDGs

Keywords

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