New report on climate change adaptation and the insurance system

June 21, 2013

The economic and insured costs of natural disasters due to extreme weather are examined in a comprehensive new report published this month: "Market-based mechanisms for climate change adaptation."

"A key finding of our review was that the rising costs of from extreme weather can be explained by growing concentrations of population and wealth in disaster-prone regions," says co-author Rade Musulin, a Chief Operating Officer of Aon Benfield Analytics .

"In some regions, such as Asia, insured losses are also increasing due to higher insurance penetration. At the moment, effects cannot be detected in the data. This is true across jurisdictions and for different perils," he says.

"The large uncertainty about just how a warming climate might affect of the type likely to cause property damage—tropical cyclones, storms including hailstorms, floods and bushfires—means that disaster risk reduction needs to be central to any strategy for adaptation. If we were better adapted to the current climate, we would be better prepared for anything that climate change may eventually throw at is. Informed land-use planning is the priority," added Professor John McAneney, Director of Risk Frontiers.

In undertaking their review of residual , the researchers expected to identify preferred approaches or elements of the various schemes that might be employed to incentivise behavioural change, at least in respect of extant risks.

However none of the schemes examined could truly be said to be successful in this regard and many have led to perverse outcomes. Other key observations include the following:

(a) transferring risk to the public purse does not reduce risk
(b) governments can spread the cost of losses across time rather than space
(c) governments can force home-owners in low risk areas to cross-subsidize the insurance premiums of those in high risk areas
(d) cross-subsidisation is increasingly difficult for private sector insurers operating in a competitive market, and
(e) governments can tax people to pay for tomorrow's disaster.

"The equity of (b), (c) and (e) needs careful reflection by policy makers", says lead author Professor John McAneny. "The real issue here is that climate change is a complex policy area and no easy answers emerged from our deliberations, at least in respect to the employment of insurance instruments."

The team has explored some new mechanisms, however, including financial instruments called Catastrophe (CAT) bonds that transfer insurance risks to the capital markets. They proposed a hypothetical Sydney flood CAT bond for residential buildings and contents in the Hawkesbury River basin, and found that the methodology is easily transferrable to other location-specific perils such as bushfires.

Explore further: Confronting worldwide disaster losses

More information: McAneney, J. et al. 2013, Market-based mechanisms for climate change adaptation: Assessing the potential for and limits to insurance and market based mechanisms for encouraging climate change adaptation, National Climate Change Adaptation Research Facility, Gold Coast, pp. 129.

Related Stories

Confronting worldwide disaster losses

November 5, 2007

In the current edition of leading journal Science, an international team of experts argues that governments and policymakers worldwide need to take swift action now to minimise mounting losses due to future natural disasters ...

Is man or nature at fault for Queensland floods?

January 19, 2011

This week's flooding in Queensland is yet another reminder of the destructive power of nature. Globally the costs of natural disasters are increasing rapidly, fuelled by societal changes such as increases in population, wealth ...

Climate change evident across Europe, report says

November 26, 2012

Climate change is affecting all regions in Europe, causing a wide range of impacts on society and the environment. Further impacts are expected in the future, potentially causing high damage costs, according to the latest ...

Experts urge caution when rebuilding after disaster

December 4, 2012

As Australia prepares for a season of heatwaves, bush fires and other extreme weather events, experts have urged disaster-hit communities to learn from past mistakes and resist the rush to rebuild things the way they were.

Recommended for you

Asteroid impact, volcanism were one-two punch for dinosaurs

October 1, 2015

Berkeley geologists have uncovered compelling evidence that an asteroid impact on Earth 66 million years ago accelerated the eruptions of volcanoes in India for hundreds of thousands of years, and that together these planet-wide ...

1 comment

Adjust slider to filter visible comments by rank

Display comments: newest first

3.3 / 5 (7) Jun 23, 2013
Note to self: Don't build anywhere near the flood plain of the Bow River. Most people with damaged homes there will not be covered by insurance.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.