W.J.W. Botzen

Insurance against climate change and flooding in the Netherlands: present, future, and comparison with other countries

Climate change is projected to cause severe economic losses, which has the potential to affect the insurance sector and public compensation schemes considerably. This article discusses the role insurance can play in adapting to climate change impacts. The particular focus is on the Dutch insurance sector, in view of the Netherlands being extremely vulnerable to climate change impacts. The usefulness of private insurance as an adaptation instrument to increased flood risks is examined, which is currently unavailable in the Netherlands. It is questioned whether the currently dominant role of the Dutch government in providing damage relief is justified from an economic efficiency perspective. Characteristics of flood insurance arrangements in the Netherlands, the United Kingdom, Germany, and France are compared in order to identify possible future directions for arrangements in the Netherlands. It is argued that social welfare improves when insurance companies take responsibility for part of the risks associated with climate change.

Dependence of flood risk perceptions on socioeconomic and objective risk factors

[1] This study examines flood risk perceptions of individuals in the Netherlands using a survey of approximately 1000 homeowners. Perceptions of a range of aspects of flood risk are elicited. Various statistical models are used to estimate the influence of socioeconomic and geographical characteristics, personal experience with flooding, knowledge of flood threats, and individual risk attitudes on shaping risk belief. The study shows that in general, perceptions of flood risk are low. An analysis of the factors determining risk perceptions provides four main insights relevant for policy makers and insurers. First, differences in expected risk are consistently related to actual risk levels, since individuals in the vicinity of a main river and low-lying areas generally have elevated risk perceptions. Second, individuals in areas unprotected by dikes tend to underestimate their risk of flooding. Third, individuals with little knowledge of the causes of flood events have lower perceptions of flood risk. Fourth, there is some evidence that older and more highly educated individuals have a lower flood risk perception. The findings indicate that increasing knowledge of citizens about the causes of flooding may increase flood risk awareness. It is especially important to target individuals who live in areas unprotected by dike infrastructure, since they tend to be unaware of or ignore the high risk exposure faced.

Evaluating Flood Resilience Strategies for Coastal Megacities

Integration of models for storms and floods, damages and protections, should aid resilience planning and investments. Recent flood disasters in the United States (2005, 2008, 2012); the Philippines (2012, 2013); and Britain (2014) illustrate how vulnerable coastal cities are to storm surge flooding (1). Floods caused the largest portion of insured losses among all catastrophes around the world in 2013 (2). Population density in flood-prone coastal zones and megacities is expected to grow by 25% by 2050; projected climate change and sea level rise may further increase the frequency and/or severity of large-scale floods (3–7).

Dealing with Uncertainty in Flood Management Through Diversification

This paper shows, through a numerical example, how to develop portfolios of flood management activities that generate the highest return under an acceptable risk for an area in the central part of the Netherlands. The paper shows a method based on Modern Portfolio Theory (MPT) that contributes to developing flood management strategies. MPT aims at finding sets of investments that diversify risks thereby reducing the overall risk of the total portfolio of investments. This paper shows that through systematically combining four different flood protection measures in portfolios containing three or four measures; risk is reduced compared with portfolios that only contain one or two measures. Adding partly uncorrelated measures to the portfolio diversifies risk. We demonstrate how MPT encourages a systematic discussion of the relationship between the return and risk of individual flood mitigation activities and the return and risk of complete portfolios. It is also shown how important it is to understand the correlation of the returns of various flood management activities. The MPT approach, therefore, fits well with the notion of adaptive water management, which perceives the future as inherently uncertain. Through applying MPT on flood protection strategies current vulnerability will be reduced by diversifying risk.

Adaptation opportunities, constraints, and limits

Since the IPCCs Fourth Assessment Report (AR4), demand for knowledge regarding the planning and implementation of adaptation as a strategy for climate risk management has increased significantly (Preston et al., 2011a; Park et al., 2012). This chapter assesses recent literature on the opportunities that create enabling conditions for adaptation as well as the ancillary benefits that may arise from adaptive responses. It also assesses the literature on biophysical and socioeconomic constraints on adaptation and the potential for such constraints to pose limits to adaptation. Given the available evidence of observed and anticipated limits to adaptation, the chapter also discusses the ethical implications of adaptation limits and the literature on system transformational adaptation as a response to adaptation limits. To facilitate this assessment, this chapter provides an explicit framework for conceptualizing opportunities, constraints, and limits (Section 16.2). In this framework, the core concepts including definitions of adaptation, vulnerability, and adaptive capacity are consistent with those used previously in the AR4 (Adger et al., 2007). However, the material in this chapter should be considered in conjunction with that of complementary WGII AR5 chapters. These include Chapter 14 (Adaptation Needs and Options), Chapter 15 (Adaptation Planning and Implementation), and Chapter 17 (Economics of Adaptation). Material from other WGII AR5 chapters is also relevant to informing adaptation opportunities, constraints, and limits, particularly Chapter 2 (Foundations for Decision Making) and Chapter 19 (Emergent Risks and Key Vulnerabilities). This chapter also synthesizes relevant material from each of the sectoral and regional chapters (Section 16.5). To enhance its policy relevance, this chapter takes as its entry point the perspective of actors as they consider adaptation response strategies over near, medium, and longer terms (Eisenack and Stecker, 2012; Dow et al., 2013a,b). Actors may be individuals, communities, organizations, corporations, non-governmental organizations (NGOs), governmental agencies, or other entities responding to real or perceived climate-related stresses or opportunities as they pursue their objectives (Patt and Schroter, 2008; Blennow and Persson, 2009; Frank et al., 2011).

Monetary Valuation of Insurance Against Flood Risk Under Climate Change

Climate change is projected to increase the risk of natural disasters, such as floods and storms, in certain regions. This is likely to raise the demand for natural disaster insurance. We present a stated preference survey using choice modeling with mixed logit estimation methods in order to examine the effects of climate change and the availability of government compensation on the demand for flood insurance by Dutch homeowners. Currently, no private insurance against flood damage is offered in the Netherlands. The results indicate that there are opportunities for the development of a flood insurance market.

Cumulative CO2 emissions: shifting international responsibilities for climate debt

In contrast to many discussions based on annual emissions, this article presents calculations and projections of cumulative contributions to the stock of atmospheric CO2 by the major players, China, Europe, India, Japan and the USA, for the period 1900–2080. Although relative contributions to the climate problem are changing dramatically, notably due to the rapid industrialization of China, long-term responsibilities for enhanced global warming have not been transparently quantified in the literature. The analysis shows that if current trends continue, by the middle of this century China will overtake the USA as the major cumulative contributor to atmospheric concentrations of CO2. This has enormous implications for the debate on the ethical responsibilities of the major greenhouse gas emitters. Effective climate policy will require both the recognition of shared responsibility and an unprecedented degree of cooperation.

Bounded Rationality, Climate Risks, and Insurance: Is There a Market for Natural Disasters?

This paper examines the role of insurances to reduce uncertainty associated with climate change losses for individuals. Of special interest is the value individuals place on the reduction of increased flood risks by insurance coverage. Using rank-dependent utility and prospect theories, risk premiums are estimated under different climate change scenarios for the Netherlands. The study delivers two main insights. First, estimation results suggest that a profitable flood insurance market could be feasible. Second, climate change has the potential to increase the profitability of offering flood insurance. (JEL D81, Q51, Q54)

Individual preferences for reducing flood risk to near zero through elevation

Climate change is expected to increase the frequency and intensity of natural disasters. Adaptation investments are required in order to limit the projected increase in natural disaster risks. Adaptation measures can reduce risk partially or completely eliminate risk. The literature on behavioural economics suggests that individuals rarely undertake measures that limit risk partially, while they may place a considerable value on measures that reduce risk to zero. This is studied for a case of adaptation to climate change and its effects on flood risk in the Netherlands. In particular, we examine whether households are willing to invest in elevating newly built structures when this is framed as eliminating flood risk. The results indicate that a majority of homeowners (52%) is willing to make a substantial investment of €10,000 to elevate a new house to a level that is safe to flooding. Differences between willingness to pay (WTP) for flood insurance and WTP for risk elimination through elevation indicate that individuals place a considerable value on the latter adaptation option. This study estimates that the “safety premium” which individuals place on risk elimination is approximately between €35 and €45 per month. The existence of a safety premium has important implications for the design of climate change adaptation policies. The decision to invest in elevating homes is significantly correlated with the expected negative effects of climate change, perceptions of flood risks, individual risk attitudes, and living close to a main river.

A Comparative Study of Public—Private Catastrophe Insurance Systems: Lessons from Current Practices

Natural disasters risk is increasing in several regions around the world as a result of socio-economic development and climate change. This indicates the importance of establishing affordable and sustainable natural disaster risk management and compensation arrangements. Given the complexity of insuring extreme risks, insurers and governments often cooperate in catastrophe insurance systems. This paper presents a comparative study of the main components and a broad range of indicators of fully private and fully public, as well as public-private (PP) insurance systems, for extreme events, in ten countries. This analysis results in the following nine main recommendations for policymakers who aim to establish new, or improve existing, insurance arrangements for natural disasters: (1) mandatory participation requirements are advisable to achieve a high market penetration rate; (2) adequate monitoring and enforcement mechanisms need to be put in place to ensure compliance with these requirements; (3) the government needs to take responsibility for part of the (extreme) damage in order to keep an insurance system financially viable and affordable; (4) private insurance companies should participate in a PP insurance scheme by selling and administering policies and by covering medium-sized losses; (5) the integration in systems of risk transferring mechanisms is advisable; (6) it is advisable that governments stimulate the building-up of insurers’ reserves by providing tax exemptions; (7) risk mitigation policies should be carefully integrated in a natural disaster insurance system; (8) a detailed assessment and mapping of risk provides the basis for an effective mitigation policy; (9) insurance should provide financial incentives for policyholders to take risk mitigation measures.