Our Common Future Under Climate Change

International Scientific Conference 7-10 JULY 2015 Paris, France

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Thursday 9 July - 17:30-19:00 UPMC Jussieu - ROOM 309 - Block 24/34

4408 - Risk and Insurance

Parallel Session

Chair(s): E. Masiello (Université Lyon 1, Lyon, France)

17:30

The role of insurance for flood risk reduction in London: An agent based model approach

K. Jenkins (University of Oxford, Oxford, United Kingdom), J. Hall (University of Oxford, Oxford, United Kingdom), S. Surminski (GranthamResearch Institute on Climate Change and the Environment|, London, United Kingdom), F. Crick (GranthamResearch Institute on Climate Change and the Environment, London, United Kingdom), I. Nikolic (Section Energy & Industry, Delft University of Technology, Netherlands), J. Dubbelboer (Section Energy & Industry, Delft University of Technology, Netherlands)

Abstract details
The role of insurance for flood risk reduction in London: An agent based model approach

K. Jenkins (1) ; J. Hall (1) ; S. Surminski (2) ; F. Crick (3) ; I. Nikolic (4) ; J. Dubbelboer (4)
(1) University of Oxford, Environmental Change Institute, Oxford, United Kingdom; (2) GranthamResearch Institute on Climate Change and the Environment|, London, United Kingdom; (3) GranthamResearch Institute on Climate Change and the Environment, London, United Kingdom; (4) Section Energy & Industry, Faculty of technology, policy and management, Delft University of Technology, Netherlands

Abstract content

Flooding is recognised as one of the most common and costliest natural disasters in England. In London surface water flooding is considered to be the most likely cause of flood events, and probably the greatest short-term climate risk. More than 800,000 properties are estimated to be at risk, and while most drainage systems are designed to cope with a 1/30 year storm event, maintenance is often poor and so parts of the network can perform below these standards.

A particularly interesting aspect of flood management in England is the public-private partnership on flood insurance between the UK government and the insurance industry. Flood insurance is underwritten by the private market, while government commits to flood risk management activities. However, this agreement is currently under review with a new insurance system, Flood Re, proposed. The proposed system, which creates an insurance pool for properties at high risk of flooding, is presented by government and industry as a roadmap to future affordability and availability of flood insurance, with an anticipated run-time of 20 to 25 years. The mechanisms of the new Flood Re scheme are still being negotiated, and to date there is little mention of how the partnership between government and insurers, and the new Flood Re scheme could also promote effective flood risk reduction measures.

In order to investigate this partnership an Agent based Model (ABM) has been developed for Greater London. The ABM characterises five different agents: property owners, insurer, developer, government, and bank, which interact within the environment. The ABM has been designed such that it can investigate the public-private partnership and the specific issue of surface water flood risk, and analyse how the current and future proposals for the partnership could influence London’s resilience to surface water flood risk today and in the future under various scenarios of climate change. Important questions it can address include the effect of surface water flood risk and insurance on household wealth; consequences of flood damage and insurance (un)availability for the housing market; and the role of incentives for risk reduction among different partners (including the government, insurers, and developers) to support flood defences, household level flood protection, and more appropriate spatial planning.

Ultimately, the model aims to highlight the potential benefits and limitations of the proposed Flood Re scheme for risk reduction, and test various options for the scheme, such as the inclusion of certain types of properties, and the financial implications of different transitional pathways to risk-based pricing of insurance in the longer-term. The model and research is highly relevant for the ongoing regulatory and political approval process for Flood Re, which have until now not received sufficient attention due to lack of data or analysis. 

The presentation will provide an overview of the ABM, the modelling of a spatially coherent probabilistic surface water flood event set, and highlight the key findings of the analysis of the current and proposed public-private partnership for risk reduction. It will highlight benefits and limitations of the current and proposed scheme, and provide recommendations for the scheme in order to help promote flood risk reduction and increase resilience in London.

17:48

What is the Role of Insurance for Addressing Climate-Driven Extreme Events?

I. Schumacher (IPAG Business School, Paris, France)

Abstract details
What is the Role of Insurance for Addressing Climate-Driven Extreme Events?

I. Schumacher (1)
(1) IPAG Business School, Paris, France

Abstract content

The insurance of climate-driven extreme events is widely viewed as a potential ex-post means of reducing the damage born by those affected. However, while there are certainly valid arguments that support the use of insurance when it comes to climate-driven extreme events, it is also clear that insurance cannot be the first-best solution to dealing with this mankind-induced problem.

 

In this article we discuss under which circumstances insurance may be viewed as a complement to adaptation and mitigation measures, and in particularly we shall focus on the following aspects: 1) when is the insurance of extreme events a desirable alternative to adaptation and mitigation policies; 2) how much value should be placed on the insurance of extreme events relativ to adaptation and mitigation policies; 3) how important are the aspects of the insurance industry for these trade-offs, in particular the transparency of the insurance sector when deciding upon its premia; the investment perspective of the insurance industry; the coverage of the insurance industry and its interplay with a social security system.

18:06

Weather index insurance in a changing climate

J. Daron (UK Met Office, Exeter, United Kingdom), D. A. Stainforth (London School of Economics, London, United Kingdom)

Abstract details
Weather index insurance in a changing climate

J. Daron (1) ; DA. Stainforth (2)
(1) UK Met Office, Applied Climate Science, Exeter, United Kingdom; (2) London School of Economics, Grantham Research Institute, London, United Kingdom

Abstract content

Insurance and risk transfer products are increasingly being made available to low income households in developing countries to protect livelihoods from extreme weather and climate events. Index insurance products – where premiums and payouts are based on a proxy for loss (e.g. total seasonal rainfall) rather than the actual economic losses suffered – typically have lower administration costs, and therefore premiums, than traditional claims based insurance. Furthermore, payouts are made immediately when the proxy is triggered, thus reducing the time between a loss event and the receipt of an insurance payout. Various proponents, including the United Nations, have therefore supported the widespread dissemination of weather index insurance as a means to reduce vulnerability to weather extremes in low income communities. However, like most lines of climate-related insurance, weather index insurance products are typically designed using historical observed data only. It has not previously been well investigated how climate change might impact the viability of weather index insurance products.

It is with this background that we developed and demonstrated a method for assessing the viability of weather index insurance under altered climate conditions (Daron and Stainforth 2014). We utilise Bayesian Networks, which are graphical networks that propagate probabilities between variables and outcomes of interest. In our study we develop them as a tool for exploration – to help understand sensitivities and support insurers in assessing pricing structures and assumptions with different climate information. We apply the tool to a case study of weather index insurance for the rice crop in Kolhapur, India.

A hypothetical weather index insurance product is used in Bayesian Networks of increasing complexity that include different sources of climate information. We include observational rainfall data in addition to output from the UK Met Office Hadley Centre regional climate model (HadRM3), driven by model reanalysis data (ERA-Interim) and general circulation models from the Hadley Centre (HadCM3) and Max Planck Institute for Meteorology (ECHAM5). We show that the model data significantly underestimates the historical observed data and therefore question the reliability and utility of the climate model output. Furthermore, we discuss how observations can also be subject to errors and uncertainties.

Depending on the choice of input data, and the process of combining different datasets, we determine very different implications for the viability of the weather index insurance product under climate change. Yet the purpose of the study is not to provide definitive answers of how climate change might impact weather index insurance in the case study region. Rather it is to demonstrate a possible method for combining multiple data sources to inform insurance decisions.

We conclude that without consideration of multiple sources of climate information, and an acknowledgement of the associated biases and errors, insurers are likely to miscalculate and misrepresent the underlying climate hazard risks with potentially adverse implications for policyholders. Used to understand the sensitivities of pricing structures and premiums to different sources of climate data, the Bayesian Network method shows promise as a potential tool to help insurers in making pricing decisions. However, the current generation of climate model output is shown to be of limited value and difficult to use by index insurance practitioners. We therefore caution that in the context of climate change, the absence of reliable, robust, quantitative model projection data means that choices considered optimal based on today’s available model information may lead to maladaptation and risk significant losses to insurers in the future.

References:

Daron, J. D. and D. A. Stainforth (2014) Assessing pricing assumptions for weather index insurance in a changing climate. Climate Risk Management, 1, 76-91

18:24

Sharing of Climate Risks across World Regions

J. Emmerling (FEEM, Milano, Italy)

Abstract details
Sharing of Climate Risks across World Regions

J. Emmerling (1)
(1) FEEM, Milano, Italy

Abstract content

Uncertainty is prevalent in the context of climate change impacts. Moreover, the distribution across the globe is not uniform. We analyze how climate risks could be reduced via an insurance scheme at the global scale across regions and quantify the potential welfare gains from such a scheme. Starting from the standard welfare analysis in Integrated Assessment Models (IAMs), which assumes no risk sharing across region, we introduce global risk sharing via a market for state-dependent Arrow-Debreu securities. We show that this allows equalizing relative consumption differences between states of the world across regions. We estimate that such risk sharing scheme of climate risks could lead to welfare gains reducing the global costs of climate change by up to one third, while the amount of transfers required is substantial. This provides arguments for considering risk sharing in IAMs, but also for potentially welfare increasing negotiations about sharing risks of climate change at the global level.

18:42

On the cost of climate change for an insurance company

D. Kortschak (Institute for Economic and Innovation Research, Graz, Austria), E. Masiello (Université Lyon 1, Lyon, France), P. Ribereau (Université Lyon 1, Lyon, France)

Abstract details
On the cost of climate change for an insurance company

D. Kortschak (1) ; E. Masiello (2) ; P. Ribereau (2)
(1) Institute for Economic and Innovation Research, Joanneum research, Graz, Austria; (2) Université Lyon 1, Institut Camille Jordan, Lyon, France

Abstract content

Climate change is of great concern for insurers because of increasing in frequency and intensity of extreme weather events which may represent some very serious insolvency issues.  From a mathematical point of view, we derive asymptotics for the ruin probability of the insurance company in a risk model  which has been updated in a way to take into account projected changes in some specific weather-related events like tropical storms for exemple.  In practice, the results obtained so far are used to try to calculate the cost of climate change for an insurance company in a simplified portfolio. Some examples are presented to illustrate the theory.