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


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


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.

Suggested Citation

  • Howard C. Kunreuther & Erwann O. Michel-Kerjan, 2007. "Climate Change, Insurability of Large-scale Disasters and the Emerging Liability Challenge," NBER Working Papers 12821, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12821
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    References listed on IDEAS

    1. Gruber, J., 1992. "State Mandated Benefits and Employer Provided Health Insurance," Working papers 92-18, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Lucie Schmidt, 2005. "Infertility Insurance Mandates and Fertility," American Economic Review, American Economic Association, vol. 95(2), pages 204-208, May.
    3. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 249-275.
    4. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-641, June.
    5. Marianne Bitler, 2005. "Effects of Increased Access to Infertility Treatment on Infant and Child Health Outcomes: Evidence from Health Insurance Mandates," PPIC Working Papers 2005.06, Public Policy Institute of California.
    6. Summers, Lawrence H, 1989. "Some Simple Economics of Mandated Benefits," American Economic Review, American Economic Association, vol. 79(2), pages 177-183, May.
    7. Jensen, Gail A & Gabel, Jon R, 1992. "State Mandated Benefits and the Small Firm's Decision to Offer Insurance," Journal of Regulatory Economics, Springer, vol. 4(4), pages 379-404, December.
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    Cited by:

    1. repec:pal:gpprii:v:42:y:2017:i:4:d:10.1057_s41288-017-0069-9 is not listed on IDEAS
    2. Kai A. Konrad & Marcel Thum, 2012. "The Role of Economic Policy in Climate Change Adaptation," CESifo Working Paper Series 3959, CESifo Group Munich.
    3. repec:spr:nathaz:v:88:y:2017:i:2:d:10.1007_s11069-017-2926-z is not listed on IDEAS
    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. Carolyn Kousky, 2010. "Learning from Extreme Events: Risk Perceptions after the Flood," Land Economics, University of Wisconsin Press, vol. 86(3).
    6. 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.
    7. 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: 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. 52(3), pages 577-598, March.
    8. Dowlatabadi, Hadi & Cook, Christina, 2007. "Climate Risk Management and Institutional Learning," Discussion Papers dp-07-19, Resources For the Future.
    9. Ajita Atreya & Susana Ferreira & Warren Kriesel, 2013. "Forgetting the Flood? An Analysis of the Flood Risk Discount over Time," Land Economics, University of Wisconsin Press, vol. 89(4), pages 577-596.
    10. Lorenzo Carrera & Gabriele Standardi & Francesco Bosello & Jaroslav Mysiak, 2014. "Assessing Direct and Indirect Economic Impacts of a Flood Event Through the Integration of Spatial and Computable General Equilibrium Modelling," Working Papers 2014.82, Fondazione Eni Enrico Mattei.
    11. Qadir, Abdul & Mokhtar, Marwan & Khalilpour, Rajab & Milani, Dia & Vassallo, Anthony & Chiesa, Matteo & Abbas, Ali, 2013. "Potential for solar-assisted post-combustion carbon capture in Australia," Applied Energy, Elsevier, vol. 111(C), pages 175-185.
    12. 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.

    More about this item

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law

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