Project: BSIK Insurance: Financial arrangements for disaster losses under climate change
Department: Spatial Analysis and Decision Support
Scientific evidence shows that the global direct economic losses from weather-related natural disasters have been rapidly increasing over the past decades (Vellinga et al, 2001). Extreme precipitation, river flooding and droughts inflict much damage, especially in low-lying deltaic areas, such as the Netherlands. For example, recent damages caused by single heavy local rainfall events in various locations in the Netherlands (Zuid Holland, Zeeland, Drenthe and Groningen) amounted to €18 million in 2001 and €353 million in 1998. More damage in the future can be expected as increased climate change is expected to cause more extreme weather events, in particular more intense precipitation (IPCC 2001). Emerging questions are whether current water management measures are sufficiently robust against extreme weather conditions and what adaptation measures can be formulated in response to increased risks (Aerts and Droogers, 2004).
Most adaptation strategies in the Dutch water sector relate to either implementing technical measures, such as building dikes, or to implementing new spatial policies, such as developing flood retention areas. It is widely recognized that existing adaptations in the water sector are insufficient to cope with climate change. Therefore, increased attention has been paid to explore financial and insurance arrangements to alleviate negative impacts of climate change and extreme events. Yet little research has been conducted in developing such tools and evaluating their efficiency in terms of costs and benefits (Bouwer and Vellinga, 2002; 2005). Commercial insurance in the Netherlands is available for individual households to cover damages from rainfall. But the losses in many other sectors in society, like the agricultural sector, are generally not covered. In these cases, the national government acts as an ‘insurer of last resort’ by providing relief.
The proposed research examines whether and in what way financial arrangements can serve as strategies to adapt to climate change. An important reason for developing financial arrangements is to search for spreading risks across the public and private sectors. Furthermore, an important question is how risks can be spatially distributed over an area susceptible to the impact of climate change. The presence of an unequal spatial risk distribution would open up the possibility of spatially differentiating insurance premiums and eligibility for government relief. This as opposed to distributing premiums and relief evenly over a country or area. The latter is in line with the ‘solidarity principle’, under which all individuals pay the same premium or are equally eligible for relief, even though risks may not be equal among individuals. Human behaviour evidently plays an important role in determining financial arrangements. In particular, insurance to extreme events could lead to a decrease in maintenance of infrastructure and houses as people expect insurance companies to cover damage (a special case of ’morale hazard’).
The general approach followed in this research project is to develop sets of financial arrangements for flood related risk sharing for The Netherlands. The project is divided in two parallel tracks: the first track explores risks and damages, focusing on spatial and temporal dimensions. The second track develops risk arrangements within the insurance sector and national government and methods to evaluate their costs and benefits (Van den Bergh, 2004).
This research is sponsored by the BSIK programme Climate Changes Spatial Planning and by the Netherlands Organisation for Scientific Research (NWO) through the Vulnerability, Adaptation and Mitigation (VAM) programme on the Social Aspects of Gradual and Abrupt Climate Change: BSIK programme Climate Changes Spatial Planning, NWO.
Faculty of Economics and Business Administration - VU, FutureWater, Interpolis, Rabobank.
Aerts, J.C.J.H. & P. Droogers (2004). Climate Change in Contrasting River Basins – Adaptation Strategies for Water, Food and the Environment. CABI, Wallingford, UK.
Bergh, J.C.J.M. van den (2004). Optimal climate policy is a utopia: from quantitative to qualitative cost-benefit analysis. Ecological Economics 48, 385-393.
Bouwer, L.M. & P. Vellinga (2002). Changing climate and increasing costs – Implications for liability and insurance. In: Beniston, M. (ed.) Climatic Change: Implications for the Hydrological Cycle and for Water Management. Kluwer, Dordrecht, 429-444.
Bouwer, L.M. & P. Vellinga (2005). Some rationales for risk sharing and financing adaptation. Water Science and Technology 51, 89-95.
IPCC (2001). Climate Change 2001: Impacts, Adaptation and Vulnerability. McCarthy, J.J., et al. (eds.). Cambridge University Press, Cambridge, UK. http://www.grida.no/climate/ipcc_tar/wg2/index.htm
Vellinga, P., E. Mills, G. Berz, L.M. Bouwer, S. Huq, L.A. Kozak, J. Palutikof, B. Schanzenbächer, C. Benson, J. Bruce, G. Frerks, P. Huyck, P. Kovacs, X. Olsthoorn, A. Peara, S. Shida & A. Dlugolecki (2001). Insurance and other financial services. Chapter 8 in: Climate Change 2001: Impacts, Adaptation, and Vulnerability. McCarthy, J.J., et al. (eds.). Cambridge University Press, Cambridge UK, 417-450. http://www.grida.no/climate/ipcc_tar/wg2/321.htm