Property rights and insurance markets to enable adaptation to natural disaster risks

A combination of economic development and climate change in the future is projected to increase the frequency and severity of natural disasters in many areas around the globe. Limiting this trend in risks of extreme weather events requires the implementation of adaptation strategies by public policy-makers as well as private actors, including property owners. Incentives for individuals to invest in such adaptation measures can be influenced by existing insurance arrangements that cover risks from extreme weather events. Several studies have suggested that insurance arrangements can contribute to adaptation by steering the behaviour of policyholders towards risk reduction, for instance, through requirements or risk-based premiums. However, there is limited evidence of insurance arrangements effectively incentivising risk reduction. Nevertheless, best practices and conditions for this can be identified, which include well-designed institutional frameworks and property rights. This chapter reviews the literature on how property insurance markets influence behaviour of policyholders with respect to their investments in risk reduction. Moreover, several guiding principles are given for the design of natural disaster insurance arrangements to encourage adaptation to changing natural disaster risks. This chapter focuses on flood risks, but draws lessons that also apply to other climate change-related risks.