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

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  • Trevor Maynard

    ()
    (Lloyd's, One Lime Street, London EC3M 7HA, U.K.)

  • Nicola Ranger

    (Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, Houghton Street, London WC2A 2AE, U.K.)

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    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.

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Issues and Practice.

    Volume (Year): 37 (2012)
    Issue (Month): 2 (April)
    Pages: 318-339

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    Handle: RePEc:pal:gpprii:v:37:y:2012:i:2:p:318-339

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