Letters from Sendai no. 7: can insurance reduce risk?

The seventh letter, by Swenja Surminski of the London School of Economics, was posted on 18 March 2015. Its question was how individuals, businesses and governments can be given reasons to reduce risk, and whether insurance pricing can supply one.

Her answer was mixed. Risk-based pricing works well for large commercial clients. For households and governments it is much harder to make the price signal change behaviour.

The letter drew on work by ENHANCE partners at IVM, IIASA, the University of Potsdam and the Grantham Research Institute, and on a new ENHANCE working paper on novel and improved insurance instruments for risk reduction (Surminski et al., 2015). Its cases included the Po basin, England and Chamusca in Portugal. That working paper is described in the D5.3 record.

Surminski presented the material twice during the week: at a flooding session of DKKV, the German disaster reduction forum, and at a Geneva Association public forum.

Her main message was about timing. Whether and how a scheme can influence risk behaviour, and who has the capacity to act on it, has to be decided early, in the design of the scheme, not bolted on once the scheme is running. The design choices of the UK’s Flood Re and the cases in the Chamusca forest fire study show what that looks like in practice.