The steep upward-rising damage trend incurred by natural hazard risk and the prospects of climate change inflate the economic losses and social hardship set-off by extreme climate and weather events. This has alarmed the governments and the insurance enterprises alike. While the probability distributions of extreme weather and climate events are becoming progressively fat-tailed, private insurers may either increase the risk premiums to levels not affordable or retire from high-risk prone areas. Sensibly designed public-private partnerships for insurance provision seem to be a promising way of balancing concerns raised by affordability and solvency of insurance schemes, and the social justice. This session explored existing and proposed schemes, at a national and EU level, and discussed their performance at the occasion of the European Climate Change Adaptation Conference (ECCA) that took place in Copenhague on 12-14th May.
Structure of the Session:
The session addressed public policy challenges in insurance provision and disaster risk reduction, with the aim of identifying promising technical advances, legal and policy reforms for the provision of affordable (and eventually, equitable) insurance in a context of raising climate risks and costs (see below for a list of the speakers and presentations). The first talk by Jaroslav Mysiak 1 provided an overview of the EU framework for insurance provision, and the main legal and policy challenges in the quest towards affordable and equitable insurance arrangements that do not conflict with solvency and budgetary constraints.
In the second presentation Paul Hudson 2 elaborated on the tradeoff between affordability and solvency and showed a model to assess the potential of risk based insurance premiums to enhance DRR and solvency, while accounting also for affordability issues through the introduction of compensations to low income households. Results for France and Germany showed that the affordability target can be met while attaining a degree of DRR that prevents unsustainable economic losses.
Anna Lorant 3 elaborated on the legal and policy challenges introduced by Jaroslav 1, with a focus on the most important post-disaster instrument of the EC, the EU Solidarity Fund. Anna’s assessment of the Fund past and post-reform features concluded that, although the instrument has improved its performance, further reforms are necessary to advance its effectiveness –specifically, its use as a reinsurance for national or regional sovereign insurance systems was advanced.
Susanne Hanger 4 focused on the notion of equity, elaborating on Jaroslav’s 1 and complementing Paul’s 2 talks. Susanne explored the tradeoffs between conventional insurance systems focusing on solvency and affordability (which Paul 2 critically addressed), and equity.
In the last talk, Franz Prettenthaler 5 discussed how risk pooling can contribute to relieve the solvency burden, an opportunity that could be used to attain the affordability and equity goals also discussed in the previous presentations without imposing further budgetary constraints. Franz assessed different flood insurance pooling schemes at a supra-national level, considering a unique EU insurance system, bilateral insurance arrangements among countries, and other options in between (including amongst others the systems of France, Germany, Belgium, Switzerland and Spain). Results showed a relevant potential to reduce premium costs.
The session discussed the challenges to design equitable/affordable and solvent insurance arrangements against natural hazards, with a focus on the role that can be played by partnerships and financial incentives. The session offered some valuable pathways to be further explored in the framework of the ENHANCE project and eventually discussed with policy makers (e.g. risk pooling, EU reinsurance tool).
1 Jaroslav MYSIAK, Fondazione Eni Enrico Mattei, Italy. Partnerships for affordable and equitable insurance provision
2 Paul HUDSON, Institute of Environmental Studies IVM, the Netherlands. Implications of risk based insurance premiums for flood preparedness and affordability of coverage
3 Anna LORANT, International Institute for Applied Systems Analysis, Laxenburg, Austria. The European Solidarity Fund, its past performance and recent reforms
4 Susanne HANGER, International Institute for Applied Systems Analysis, Laxenburg, Austria. Designing national flood insurance systems: the equity-efficiency trade-off
5 Franz PRETTENTHALER, JOANNEUM RESEARCH, Graz, Austria. Financial risk transfer mechanisms – Comparison of alternative national systems for managing flood risks and quantifying capital requirements
Note to readers:
By Dionisio Pérez Blanco, of the Fondazione Eni Enrico Mattei (FEEM) and the Euro-Mediterranean Center on Climate Change, Jaroslav Mysiak (FEEM) and Swenja Surminski (LSE). Copenhague, 14 May 2015.
The ENHANCE project is investigating insurance solutions for several different natural hazards across Europe. Recent outputs are available online. You can also have a look at the Working Paper 01: Reflection on the current debate on how to link flood insurance and disaster risk reduction in the European Union.