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Insuring future climate catastrophes

Kunreuther, Howard, Michel-Kerjan, Erwann and Ranger, Nicola (2013) Insuring future climate catastrophes. Climatic Change, 118 (2). p. 354. ISSN 0165-0009

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Identification Number: 10.1007/s10584-012-0625-z

Abstract

The combined influences of a change in climate patterns and the increased concentration of property and economic activity in hazard-prone areas has the potential of restricting the availability and affordability of insurance. This paper evaluates the premiums that private insurers are likely to charge and their ability to cover residential losses against hurricane risk in Florida as a function of (a) recent projections on future hurricane activity in 2020 and 2040; (b) insurance market conditions (i.e., soft or hard market); (c) the availability of reinsurance; and (d) the adoption of adaptation measures (i.e., implementation of physical risk reduction measures to reduce wind damage to the structure and buildings). We find that uncertainties in climate projections translate into a divergent picture for insurance in Florida. Under dynamic climate models, the total price of insurance for Florida (assuming constant exposure) could increase significantly by 2040, from $12.9 billion (in 1990) to $14.2 billion, under hard market conditions. Under lower bound projections, premiums could decline to $9.4 billion by 2040. Taking a broader range of climate change scenarios, including several statistical ones, prices could be between $4.7 and $32.1 billion by 2040. The upper end of this range suggests that insurance could be unaffordable for many people in Florida. The adoption of most recent building codes for all residences in the state could reduce by nearly half the expected price of insurance so that even under high climate change scenarios, insurance premiums would be lower than under the 1990 baseline climate scenario. Under a full adaptation scenario, if insurers can obtain reinsurance, they will be able to cover 100 % of the loss if they allocated 10 % of their surplus to cover a 100-year return hurricane, and 63 % and 55 % of losses from a 250-year hurricane in 2020 and 2040. Property-level adaptation and the maintenance of strong and competitive reinsurance markets will thus be essential to maintain the affordability and availability of insurance in the new era of catastrophe risk.

Item Type: Article
Official URL: http://link.springer.com/journal/10584
Additional Information: © 2012 Springer Science+Business Media Dordrecht
Divisions: Grantham Research Institute
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
Sets: Research centres and groups > Grantham Research Institute on Climate Change and the Environment
Date Deposited: 02 Jan 2013 11:04
Last Modified: 20 May 2019 01:26
Projects: SES-1062039, 1048716, SES-0949710, SES-0345840
Funders: Wharton Risk Center’s Extreme Events project, National Science Foundation, Travelers Foundation, Center for Climate and Energy Decision Making, Center for Research on Environmental Decisions, CREATE at University of Southern California, Economic and Social Research Council (ESRC) and Munich Re
URI: http://eprints.lse.ac.uk/id/eprint/47830

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