What Role for “Long-term Insurance” in Adaptation? An Analysis of the Prospects for and Pricing of Multi-year Insurance Contracts

Abstract

Multi-year insurance has been proposed as a tool to incentivise policy-holders to invest in property-level adaptation. In a world of rising natural catastrophe risks, such autonomous adaptations could have significant benefits for the property owner, the insurer and society. We review some arguments made in respect of multi-year contracts and provide new analyses on their price implications. We conclude that even under conditions of known and stationary risk, initial capital requirements could be around 50 per cent higher for a 10-year contract than an annual contract and the annual premium around 5.5 per cent higher; in the real world of changing and uncertain risks, premiums would be even higher. We also conclude that multi-year contracts have several additional disadvantages that are likely to limit their demand and availability in the general retail insurance market. For adaptation, we conclude that other tools, such as risk-based premiums and loans for adaptation tied to the property, have greater potential.

Business and Climate Change Governance

“…This undermines the ability of traditional insurers to unite around common risk-management objectives as the industry has now become so diversified. This further supports insurers' preference for yearly policies, which they can rapidly re-price, rather than commit to longer-term, and therefore more uncertain (and expensive), policies over which they have less control (Maynard and Ranger, 2011).…”

Insurance engagement in flood risk reduction – examples from household and business insurance in developed countries

“…This is often seen as a barrier for risk prevention, as most risk reduction measures only pay off in the long run -both for insurance companies as well as policyholders (Michel-Kerjan and Kunreuther, 2011). On the other hand, multi-year contracts will be more expensive as they need to consider future uncertainties (Maynard and Ranger, 2012) and thus can be expected to decrease insurance demand. In addition, 1-year contracts give the insurers the flexibility to adapt their business to changing conditions such as changes in flood risk due to climate change.…”

“…The insurer held a high market share in this region and at that time there were not many competitors offering flood insurance on the market. The 16-month withdrawal resulted in the construction of levees by the government (McAneney et al, 2016). The threat of insurance withdrawal is, for example, used in the NFIP in the USA, where policyholders in the 100-year flood zone are only eligible for insurance when they and their municipality fulfill certain adaptation obligations (National Flood Insurance Programme, 2012).…”

Insurance companies should collect a carbon levy

“…New products such as multi-year contracts are also being tried 3 . These can incentivize customers to adapt their properties, for example with flood-proofing.…”

“…These can incentivize customers to adapt their properties, for example with flood-proofing. Cheap loans that help towards such adaptations may have even greater potential 3 .…”