Abstract
The paper outlines the role of insurance as an economic policy tool that can be used to address the issue of climate change. The magnitude of potential loss, the adverse social and economic consequences for millions of people and considerable fiscal strain imposed on government budgets by extreme weather events all indicate that governments can benefit significantly from the use of an insurance instrument capable not only of covering damage but also of providing an incentive for risk reduction behaviours. By examining the diverse insurance systems that exist in European countries and grouping them into five stylised models, natural hazards insurance is examined in terms of private and public involvement. The paper analyses the performance of different insurance models in relation to information imperfections (i.e. adverse selection and moral hazard) and market imperfections (i.e. charity hazard and transaction costs). In addition, the different models are examined in terms of the extent to which they incentivise mechanisms that facilitate the mitigation of greenhouse gas emissions, adaptation to the inevitable impacts of climate change and the development of climate risk finance management. Some concluding remarks are offered regarding the possible future development of a European insurance model as a means of developing an economically effective response to natural hazards caused by climate change.
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Notes
The IPCC is currently starting to outline its Fifth Assessment Report (AR5) which will be finalised in 2014. The new assessment will take into account recent scientific and policy developments and will be organised around a revised set of socio-economic, climate and environmental scenarios.
For a survey of events in other countries, see Höppe and Löw (2012).
A “natural catastrophe” refers to a natural event that causes damages which exceed the social and economic coping capacity of a region or nation. For statistical reasons, the definition of natural disaster is often simplified. For example, Munich Re considers a natural event a “major disaster” if fatalities (deaths) exceed ten, personal injuries exceed thirty, and the economic loss caused by the event exceeds 15 million euros. For a survey of different concepts and definitions of natural catastrophe, see Mueller (2000).
Agrawala and Fankhauser (2008).
Charpentier (2008).
Grossi and Kunreuther (2005).
Kaplow (1991).
Faure (2006).
Browne and Hoyt (2000).
Directive 92/49/EEC of 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life insurance.
CEA (2005).
In this regard, free market “natural hazardism”, following Anderson and Leal’s (2001) concept of “free market environmentalism”, is a nirvana approach.
For a detailed analysis of the concept of “solidarity” in the case of natural disaster insurance, see Van den Bergh and Faure (2006).
Porrini (2005).
Shavell (1979).
For an overview of different forms of moral hazard, see Baker (1996).
Von Ungern-Sternberg (2002).
Evidence of this sort is to be found in Raschky et al. (2010).
Extreme weather or climate-related events (in short: “climate risks”) are defined as the occurrence of a value of a weather or climate variable above (or, for example in the case of droughts, below) a threshold value near the upper (or lower) end of the range of observed values of the variable, in accordance with the IPCC SREX (forthcoming).
For a critical analysis of the role of the insurance sector in addressing mitigation, see Phelan et al. (2011).
Mills (2009, pp. 18–19).
Aakre et al. (2010).
Boyer and Porrini (2002).
Association of British Insurers (2005).
Lewis (2007).
Dischel (2002).
For a survey of the diffusion and the characteristics of catastrophe bonds, see Carpenter (2010).
Porrini (2012).
Schwarze and Wagner (2007).
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Acknowledgments
We would like to thank the participants of the European Association of Law and Economics (EALE) Annual Conference, Hamburg, 22–25 September 2011 and of the 14th Joint Seminar of the European Association of Law and Economics and the Geneva Association, University of Innsbruck, 24–25 February 2011 for their useful comments.
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Porrini, D., Schwarze, R. Insurance models and European climate change policies: an assessment. Eur J Law Econ 38, 7–28 (2014). https://doi.org/10.1007/s10657-012-9376-6
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DOI: https://doi.org/10.1007/s10657-012-9376-6