When disaster strikes, who pays for the impacts of climate change?

Insurance is not always the most suitable solution, writes Swenja Surminsk

Submission to the inquiry on 'Future flood prevention' by the House of Commons Select Committee on Environment, Food and Rural Affairs

This is a submission by the ESRC Centre for Climate Change Economics and Policy and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science to the inquiry on ‘Future flood prevention’ by the House of Commons Select Committee on Environment, Food and Rural Affairs. The submission draws on our research, which provides strong evidence that the UK needs to develop a comprehensive strategy for flood risk management. The strategy needs to adopt a holistic approach, and include better land-use and planning policy, increased resilience for existing housing stock, improved flood defences and affordable insurance. The National Flood Resilience Review, launched by the Government in December 2015, could be an important step towards the creation of a comprehensive flood risk management strategy for the UK

Insurance can encourage data on African climate risks to inform government decision-making

As the effects of climate change in Africa become increasingly pronounced, government policymaking should build effective adaptation measures. But the lack of data on African climate risks is a barrier to knowing how. New research shows that insurance policies can produce useful information on climate risks and help to build effective risk management and decision-making

Flood Re: a missed opportunity for sustainable flood risk management?

The government and the insurance industry have recently launched Flood Re, a scheme that aims to make home insurance affordable to those living in a flood risk area. But that alone does not solve the problem, writes Swenja Surminski. These efforts should be accompanied by improvements to land-use planning, as well as by steps to build stronger flood defences, as these are some of the changes that will provide a more comprehensive management of flood risk

The role of insurance in reducing direct risk: the case of flood insurance

The provision of flood insurance is a patchwork, with countries showing varying degrees of penetration, coverage types, demand levels, and design structures. This article explores the current understanding of flood insurance with a specific focus on the ability of flood insurance to contribute to direct risk reduction. The starting point is a consideration of the existing provision of flood insurance, both in established insurance markets and in developing countries. A review of efforts to analyse and explain the use and design of flood insurance highlights how the understanding of supply and demand determinants is steadily growing, while clear gaps also emerge. Particularly the question of utilizing flood insurance in the context of climate change and as a lever for physical risk reduction would benefit from further empirical and theoretical analysis. The article concludes with a reflection on current efforts to reform and design flood insurance and offers some pointers for future research

A preliminary assessment of the impact of climate change on non-life insurance demand in the BRICS economies

Over the past decade, the increase in insurance demand in the BRICS has been a key driver of global non-life premium growth. Current forecasts suggest that these markets will continue to be areas of significant expansion. For example, based on a simple model, we project that gross premium volumes in the BRICS economies could increase at a rate of between 5.4 and 12.3% per year over the coming decade, depending on the country. We consider how climate change may influence these trends in the period to 2030. We argue that the influence of climate change will be more multifaceted, complex and regionally variable than portrayed in the past. We suggest five pathways of influence: wealth; willingness to pay for insurance; policy and regulation; changes to the supply of insurance; and new opportunities associated with adaptation and mitigation. We conclude that, with the exception of policy and regulation, the influence of climate change on insurance demand to 2030 is likely to be small when compared with the expected growth due to rising incomes, but is not insignificant. For example, we expect the impact on premium volumes mediated through wealth to be small; less than a 0.4% adjustment in the annual growth rate to 2030. But, we also conclude that the scale of the risks and opportunities will depend partly on (re)insurer responses to the challenges of climate change. We outline five actions that could pave the way for future opportunities

How normative interpretations of climate risk assessment affect local decision making: an exploratory study at the city scale in Cork, Ireland

Urban areas already suffer substantial losses in both economic and human terms from climate related disasters. These losses are anticipated to grow substantially, in part as a result of the impacts of climate change. In this paper we investigate the process of translating climate risk data into action for the city level. We apply a commonly used decision-framework as our backdrop and explore where in this process climate risk assessment and normative political judgments intersect. We use the case of flood risk management in Cork city in Ireland to investigate what is needed for translating risk assessment into action at the local city level. Evidence presented is based on focus group discussions at two stakeholder workshops, and a series of individual meetings and phone-discussions with stakeholders involved in local decision making related to flood risk management and adaptation to climate change, in Ireland. Respondents were chosen on the basis of their expertise and/or involvement in the decision making processes locally and nationally. Representatives of groups affected by flood risk and flood risk management/adaptation efforts were also included. The Cork example highlights that, despite ever more accurate data and an increasing range of theoretical approaches available to local decision makers, it is the normative interpretation of this information that determines what action is taken. The use of risk assessments for decision making is a process that requires normative decisions, such as setting ‘acceptable risk levels’ and identifying ‘adequate’ protection levels, which will not succeed without broader buy-in and stakeholder participation. Identifying and embracing those up-front could strengthen the urban adaptation process - this may in fact turn out to be the biggest advantage of climate risk assessment: it offers an opportunity to create a shared understanding of the problem and enables an informed evaluation and discussion of remedial action

Current and future flood risk of new build homes across different socio-economic neighbourhoods in England and Wales

Despite improvements in the management of flood risk and the introduction of new regulations, losses from flooding remain high. An important driver is the continuation of new assets being built in flood prone locations. Over the last decade over 120,000 new homes in England and Wales have been built in flood prone areas. While the yearly rates of new homes in flood risk areas have increased only moderately on the national level, significant differences between and within regions as well as between different flood types exist. Using property level data on new homes built over the last decade and information on the socio-economic development of neighbourhoods, we analyse spatial clusters of disproportional increase in flood exposure from recently built homes and investigate how these patterns evolve under different future climate scenarios. We find that a disproportionately higher number of homes built in struggling or declining neighbourhoods between 2008 and 2018 is expected to end up in areas at a high risk of flooding over their lifetime as a result of climate change. Based on these findings, we discuss issues regarding future spending on flood defences, affordability of private level flood protection and insurance as well as the role of spatial planning for adaptation in the face of climate change

Flood insurance schemes and climate adaptation in developing countries

Risk transfer, including insurance, is widely recognized as a tool for increasing financial resilience to severe weather events such as floods. The application of this mechanism varies widely across countries, with a range of different types and schemes in operation. While most of the analytical focus has so far been on those markets that have a long tradition of insurance, there is still a clear gap in our understanding of how this mechanism works in a developing country context. This paper assesses 27 insurance schemes that transfer the risk of economic losses arising from floods in low—and middle income countries, focusing on the linkages between financial risk transfer and risk reduction. This aspect is important to avoid the effect of moral hazard and has gained particular relevance in the context of the climate change adaptation discourse, where some scholars and practitioners view insurance as a potential tool not just for current risks, but also to address projected future impacts of a changing climate by incentivizing risk reduction. We therefore look beyond the pure financial risk transfer nature of those 27 insurance schemes and investigate any prevention and risk reduction elements. Our analysis suggests that the potential for utilizing risk transfer for risk reduction is far from exhausted, with only very few schemes showing an operational link between risk transfer and risk reduction, while the effectiveness and implementation on the ground remains unclear. The dearth of linkages between risk reduction and insurance is a missed opportunity in the efforts to address rising risk levels, particularly in the context of climate change. Rising risk levels pose a threat to the insurability of floods, and insurance without risk reduction elements could lead to moral hazard. Therefore a closer linkage between risk transfer and risk reduction could make this a more sustainable and robust tool