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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

  • Trevor Maynard
  • Nicola Ranger
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    Multi-year insurance has been proposed as a tool to incentivise policyholders to invest in propertylevel 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 the arguments forand against 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% higher for a 10-year contract than an annual contract and the annual premium around 5.5% 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, a preliminary analysis of existing evidence suggests that other tools, such as risk-based premiums and loans for adaptation tied to the property, have greater potential

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    File URL: http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2011/09/WP62_adaptation-pricing-insurance.pdf
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    Paper provided by Grantham Research Institute on Climate Change and the Environment in its series GRI Working Papers with number 62.

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    Date of creation: Sep 2011
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    Handle: RePEc:lsg:lsgwps:wp62
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    1. Eric Neumayer & Fabian Barthel, 2011. "Normalizing economic loss from natural disasters: a global analysis," LSE Research Online Documents on Economics 30785, London School of Economics and Political Science, LSE Library.
    2. Kunreuther, Howard & Meszaros, Jacqueline & Hogarth, Robin M. & Spranca, Mark, 1995. "Ambiguity and underwriter decision processes," Journal of Economic Behavior & Organization, Elsevier, vol. 26(3), pages 337-352, May.
    3. Kunreuther, Howard, 1996. "Mitigating Disaster Losses through Insurance," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 171-87, May.
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