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Climate Change, Insurability of Large-scale Disasters and the Emerging Liability Challenge

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  • Howard C. Kunreuther
  • Erwann O. Michel-Kerjan

Abstract

This paper focuses on the interaction between uncertainty and insurability in the context of some of the risks associated with climate change. It discusses the evolution of insured losses due to weather-related disasters over the past decade, and the key drivers of the sharp increases in both economic and insured catastrophe losses over the past 20 years. In particular we examine the impact of development in hazard-prone areas and of global warming on the potential for catastrophic losses in the future. In this context we discuss the implications for insurance risk capital and the capacity of the insurance industry to handle large-scale events. A key question that needs to be addressed is the factors that determine the insurability of a risk and the extent of coverage offered by the private sector to provide protection against extreme events where there is significant uncertainty surrounding the probability and consequences of a catastrophic loss. We discuss the concepts of insurability by focusing on coverage for natural hazards, such as earthquakes, hurricanes and floods. The paper also focuses on the liability issues associated with global climate change, and possible implications for insurers (including D&O), given the difficulty in identifying potential defendants, tracing harm to their actions and apportioning damages among them. The paper concludes by suggesting ways that insurers can help mitigate future damages from global climate change by providing premium reductions and rate credits to companies investing in risk-reducing measures.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12821.

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Date of creation: Jan 2007
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Handle: RePEc:nbr:nberwo:12821

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Cited by:
  1. W. Botzen & J. Bergh & L. Bouwer, 2010. "Climate change and increased risk for the insurance sector: a global perspective and an assessment for the Netherlands," Natural Hazards, International Society for the Prevention and Mitigation of Natural Hazards, vol. 52(3), pages 577-598, March.
  2. Dowlatabadi, Hadi & Cook, Christina, 2007. "Climate Risk Management and Institutional Learning," Discussion Papers dp-07-19, Resources For the Future.
  3. Deryugina, Tatyana, 2011. "The Role of Transfer Payments in Mitigating Shocks: Evidence From the Impact of Hurricanes," MPRA Paper 53307, University Library of Munich, Germany, revised 08 Aug 2013.
  4. Erwann O. Michel-Kerjan & Carolyn Kousky, 2010. "Come Rain or Shine: Evidence on Flood Insurance Purchases in Florida," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 369-397.
  5. Botzen, W.J.W. & Bouwer, L.M. & van den Bergh, J.C.J.M., 2010. "Climate change and hailstorm damage: Empirical evidence and implications for agriculture and insurance," Resource and Energy Economics, Elsevier, vol. 32(3), pages 341-362, August.
  6. Kai A. Konrad & Marcel Thum, 2012. "The Role of Economic Policy in Climate Change Adaptation," CESifo Working Paper Series 3959, CESifo Group Munich.

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