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Impacts of Climate Change and Remote Natural Catastrophes on EU Flood Insurance Markets: An Analysis of Soft and Hard Reinsurance Markets for Flood Coverage

1
Institute for Environmental Studies, VU University Amsterdam, De Boelelaan 1087, 1081 HV Amsterdam, The Netherlands
2
Utrecht University School of Economics, Utrecht University, Kriekenpitplein 21-22, 3584 EC Utrecht, The Netherlands
3
Risk Management and Decision Processes Center, The Wharton School, University of Pennsylvania, 3819 Chestnut Street, PA 19104-5340, Philadelphia, USA
4
Deltares, Boussinesqweg 1, 2629 HV Delft, The Netherlands
*
Author to whom correspondence should be addressed.
Atmosphere 2020, 11(2), 146; https://doi.org/10.3390/atmos11020146
Received: 13 December 2019 / Revised: 23 January 2020 / Accepted: 27 January 2020 / Published: 29 January 2020
The increasing frequency and severity of natural catastrophes due to climate change is expected to cause higher natural disaster losses in the future. Reinsurance companies bear a large share of this risk in the form of excess-of-loss coverage, where they underwrite the most extreme portion of insurers’ risk portfolios. Past experience has shown that after a very large natural disaster, or multiple disasters in close succession, the recapitalization need of reinsurers could trigger a “hard” reinsurance capital market, where a high demand for capital increases the price charged by investors, which is opposed to a “soft” market, where there is a high availability of capital for reinsurers. Consequently, the rising costs of underwriting are transferred to insurers, which ultimately could trigger higher premiums for natural catastrophe (NatCat) insurance worldwide. Here, we study the vulnerability of riverine flood insurance systems in the EU to global reinsurance market conditions and climate change. To do so, we apply the “Dynamic Integrated Flood Insurance” (DIFI) model, and compare insurance premiums, unaffordability, and the uptake for soft and hard reinsurance market conditions under an average and extreme scenario of climate change. We find that a rising average and higher variance of flood risk towards the end of the century can increase flood insurance premiums and cause higher premium volatility resulting from global reinsurance market conditions. Under a “mild” scenario of climate change, the projected yearly premiums for EU countries, combined, are €1380 higher under a hard compared to a soft reinsurance capital market in 2080. For a high-end climate change scenario, this difference becomes €3220. The rise in premiums causes problems with the unaffordability of flood coverage and results in a declining demand for flood insurance, which increases the financial vulnerability of households to flooding. A proposed solution is to introduce government reinsurance for flood risk, as governments can often provide cheaper reinsurance coverage and are less subject to the volatility of the capital markets.
Keywords: climate change; flood (re)insurance; unaffordability; market penetration; capital markets; vulnerability; remote impacts climate change; flood (re)insurance; unaffordability; market penetration; capital markets; vulnerability; remote impacts
MDPI and ACS Style

Tesselaar, M.; Botzen, W.J.W.; Aerts, J.C. Impacts of Climate Change and Remote Natural Catastrophes on EU Flood Insurance Markets: An Analysis of Soft and Hard Reinsurance Markets for Flood Coverage. Atmosphere 2020, 11, 146.

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