Insuring climate catastrophes in Florida: an analysis of insurance pricing and capacity under various scenarios of climate change and adaptation measures
The combined influences of a change in climate and the increased concentration of property and economic activity in hazard-prone areas has the potential to threaten the availability and affordability of insurance in some regions. This paper evaluates the premiums that private insurers are likely to charge and their ability to cover residential losses against hurricane risk in Florida as a function of (a) recent projections on future hurricane activity in 2020 and 2040; (b) insurance market conditions (i.e., soft or hard market); (c) the availability of reinsurance; and (d) the adoption of adaptation measures(i.e., implementation of physical risk reduction measures to reduce wind damage to the structure and buildings). For the residential portfolio the total price of insurance across Florida (pure premium with no loading) is estimated at $9 billion in a soft market and $13 billion in a hard market for the 1990 baseline climate conditions. For the worst case climate scenario in a hard market with the present design of Florida homes as of 2009 (current adaptation), the annual total price increases to $25 billion in 2020 and $32 billion in 2040. Adaptation measures can significantly reduce losses and the total premium; for example, in a hard market, where all homes in Florida meet the current building code (full adaptation), the total insurance premium would decrease from $13 to $6 billion for the 1990 baseline. If insurers can access reinsurance they will be able to cover 100% of the loss for a 100-year return hurricane, and 63% and 55% for a 250-year hurricane in 2020 and 2040 under a full adaptationscenario. Property-level adaptation and the maintenance of strong and competitive reinsurance markets will thus be essential to maintain the affordability and availability of insurance in the new era of catastrophe risk.
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