Public–Private Insurance Partnerships for Adapting to Multi-Hazard Climate Change Risks

Introduction

Natural disasters cause substantial economic losses, which are expected to increase due to climate change. The insurance sector plays a central role in managing these risks. It is thus imperative that insurers accurately assess and address climate risks.

Current Limitations in Risk Assessment

Risk assessment methods currently fall short in accurately understanding climate risks because they focus on single hazards (e.g. floods) instead of correlated multi-hazard risks (e.g. windstorms and floods) affected by climate change.

They also insufficiently account for human climate adaptation processes leading to risk reduction, which are characterized by bounded rationality and social interaction. Furthermore, additional insights are needed into how to design insurance arrangements that address climate change and stimulate policyholders to adapt to multi-hazard climate risks by limiting natural disaster damage.

Project Objectives

This project aims to design insurance arrangements to enhance policyholders' adaptation to multi-hazard climate risks by combining financial coverage with comprehensive strategies for stimulating risk reduction.

Interdisciplinary Approach

Its interdisciplinary approach goes beyond the state-of-the-art by:

1. Creating novel multi-hazard climate risk assessments for insurance.
2. Developing agent-based models (ABMs) that account for boundedly rational human adaptation decisions and social interaction.

The ABMs evaluate natural disaster insurance arrangements for EU countries with diverse risk contexts and assess strategies for stimulating adaptation by policyholders, based on input from behavioural economic studies.

Methodology

Repeated and real-time surveys and economic experiments will identify comprehensive strategies for triggering behavioural change to stimulate adaptation to the multitude of climate change risks individuals face.

These strategies linked to (public-private) insurance combine:

• Communication on risk and risk reduction measures.
• Insurance incentives (e.g. deductibles, premium discounts).
• Nudges.