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Insurability of Climate Risks

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  • Arthur Charpentier

    () (ENSAE and ESC Rennes Business School, Université Rennes 1, Faculté des Sciences Economiques, 7, place Hoche, 35065 Rennes cedex, France.)

Abstract

The IPCC 2007 report noted that both the frequency and strength of hurricanes, floods and droughts have increased during the past few years. Thus, climate risk, and more specifically natural catastrophes, are now hardly insurable: losses can be huge (and the actuarial pure premium might even be infinite), diversification through the central limit theorem is not possible because of geographical correlation (a lot of additional capital is required), there might exist no insurance market since the price asked by insurance companies can be much higher than the price householders are willing to pay (short-term horizon of policyholders), and, due to climate change, there is more uncertainty (and thus additional risk). The first idea we will discuss in this paper, about insurance markets and climate risks, is that insurance exists only if risk can be transferred, not only to reinsurance companies but also to capital markets (through securitization or catastrophes options). The second one is that climate is changing, and therefore, not only prices and capital required should be important, but also uncertainty can be very large. It is extremely difficult to insure in a changing environment. The Geneva Papers (2008) 33, 91–109. doi:10.1057/palgrave.gpp.2510155

Suggested Citation

  • Arthur Charpentier, 2008. "Insurability of Climate Risks," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 33(1), pages 91-109, January.
  • Handle: RePEc:pal:gpprii:v:33:y:2008:i:1:p:91-109
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    Cited by:

    1. Roger Fouquet (ed.), 2013. "Handbook on Energy and Climate Change," Books, Edward Elgar Publishing, number 14429.
    2. Whalley, John & Yuan, Yufei, 2009. "Global financial structure and climate change," Journal of Financial Transformation, Capco Institute, vol. 25, pages 161-168.
    3. Surminski, Swenja, 2014. "The role of insurance in reducing direct risk: the case of flood insurance," LSE Research Online Documents on Economics 60764, London School of Economics and Political Science, LSE Library.
    4. Amanda Savitt, 2017. "Insurance as a tool for hazard risk management? An evaluation of the literature," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 86(2), pages 583-599, March.
    5. Susannah Fisher & Swenja Surminski, 2012. "The roles of public and private actors in the governance of adaptation: the case of agricultural insurance in India," GRI Working Papers 89, Grantham Research Institute on Climate Change and the Environment.
    6. Fisher, Susannah & Surminski, Swenja, 2012. "The roles of public and private actors in the governance of adaptation: the case of agricultural insurance in India," LSE Research Online Documents on Economics 46400, London School of Economics and Political Science, LSE Library.
    7. Jinhong Wan & Ruoxi Li & Wenxin Wang & Zhongmei Liu & Bizhen Chen, 2016. "Income Diversification: A Strategy for Rural Region Risk Management," Sustainability, MDPI, Open Access Journal, vol. 8(10), pages 1-12, October.
    8. Paul Hudson, 2018. "A comparison of definitions of affordability for flood risk adaption measures: a case study of current and future risk-based flood insurance premiums in Europe," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 23(7), pages 1019-1038, October.
    9. Swenja Surminski & Delioma Oramas-Dorta, 2013. "Do flood insurance schemes in developing countries provide incentives to reduce physical risks?," GRI Working Papers 119, Grantham Research Institute on Climate Change and the Environment.
    10. Grislain-Letrémy, Céline, 2012. "Assurance et prévention des catastrophes naturelles et technologiques," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/9073 edited by Villeneuve, Bertrand.
    11. Erwann Michel-Kerjan, 2013. "Finance des risques catastrophiques. Le marché américain est en plein bouleversement," Revue économique, Presses de Sciences-Po, vol. 64(4), pages 615-634.
    12. Botzen, W.J.W. & van den Bergh, J.C.J.M., 2012. "Risk attitudes to low-probability climate change risks: WTP for flood insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 151-166.
    13. Surminski, Swenja & Oramas-Dorta, Delioma, 2013. "Flood insurance schemes and climate adaptation in developing countries," LSE Research Online Documents on Economics 66294, London School of Economics and Political Science, LSE Library.
    14. Surminski, Swenja & Eldridge, Jillian, 2015. "Flood insurance in England: an assessment of the current and newly proposed insurance scheme in the context of rising flood risk," LSE Research Online Documents on Economics 66256, London School of Economics and Political Science, LSE Library.
    15. Mohor, Guilherme Samprogna & Mendiondo, Eduardo Mario, 2017. "Economic indicators of hydrologic drought insurance under water demand and climate change scenarios in a Brazilian context," Ecological Economics, Elsevier, vol. 140(C), pages 66-78.
    16. Roger Fouquet, 2013. "Low-carbon economy: dark age or golden age?," Chapters, in: Roger Fouquet (ed.),Handbook on Energy and Climate Change, chapter 32, pages 682-708, Edward Elgar Publishing.
    17. Swenja Surminski & Paul Hudson & Jeroen Aerts & Wouter Botzen & M.Conceição Colaço & Florence Crick & Jill Eldridge & Anna Lorant & António Macedo & Reinhard Mechler & Carlos Neto & Robin Nicolai & Di, 2015. "Novel and improved insurance instruments for risk reduction," GRI Working Papers 188, Grantham Research Institute on Climate Change and the Environment.
    18. Hao Guo & Xingming Zhang & Fang Lian & Yuan Gao & Degen Lin & Jing’ai Wang, 2016. "Drought Risk Assessment Based on Vulnerability Surfaces: A Case Study of Maize," Sustainability, MDPI, Open Access Journal, vol. 8(8), pages 1-22, August.
    19. Donatella Porrini & Reimund Schwarze, 2014. "Insurance models and European climate change policies: an assessment," European Journal of Law and Economics, Springer, vol. 38(1), pages 7-28, August.
    20. Swenja Surminski & Jillian Eldridge, 2014. "Flood insurance in England � an assessment of the current and newly proposed insurance scheme in the context of rising flood risk," GRI Working Papers 144, Grantham Research Institute on Climate Change and the Environment.

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