Climatic Change

, Volume 118, Issue 2, pp 339–354 | Cite as

Insuring future climate catastrophes

  • Howard Kunreuther
  • Erwann Michel-Kerjan
  • Nicola Ranger


The combined influences of a change in climate patterns and the increased concentration of property and economic activity in hazard-prone areas has the potential of restricting the availability and affordability of insurance. 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). We find that uncertainties in climate projections translate into a divergent picture for insurance in Florida. Under dynamic climate models, the total price of insurance for Florida (assuming constant exposure) could increase significantly by 2040, from $12.9 billion (in 1990) to $14.2 billion, under hard market conditions. Under lower bound projections, premiums could decline to $9.4 billion by 2040. Taking a broader range of climate change scenarios, including several statistical ones, prices could be between $4.7 and $32.1 billion by 2040. The upper end of this range suggests that insurance could be unaffordable for many people in Florida. The adoption of most recent building codes for all residences in the state could reduce by nearly half the expected price of insurance so that even under high climate change scenarios, insurance premiums would be lower than under the 1990 baseline climate scenario. Under a full adaptation scenario, if insurers can obtain reinsurance, they will be able to cover 100 % of the loss if they allocated 10 % of their surplus to cover a 100-year return hurricane, and 63 % and 55 % of losses from a 250-year hurricane in 2020 and 2040. 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.


Return Period Climate Change Scenario Climate Scenario Wind Damage National Flood Insurance Program 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.



This research is part of an ongoing collaboration between the Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania, the Centre for Climate Change Economics and Policy (CCCEP) at the LSE and Risk Management Solutions (RMS). The paper has benefited from excellent research assistance by Peter Eschenbrenner and Chieh Ou-Yang, editorial assistance by Carol Heller, and comments on an earlier version by Jeroen Aerts, Wouter Botzen, Simon Dietz and two referees. We would like to thank Risk Management Solutions for providing some of the data on hurricane risks in Florida which made our analysis possible. We acknowledge partial support from the Wharton Risk Center’s Extreme Events project, the National Science Foundation (SES-1062039 and 1048716), the Travelers Foundation, the Center for Climate and Energy Decision Making (NSF Cooperative Agreement SES-0949710 with Carnegie Mellon University), the Center for Research on Environmental Decisions (CRED; NSF Cooperative Agreement SES-0345840 to Columbia University) and CREATE at University of Southern California. Dr. Ranger acknowledges the support of the UK Economic and Social Research Council (ESRC) and Munich Re.

Supplementary material

10584_2012_625_MOESM1_ESM.pdf (87 kb)
ESM 1 (PDF 87.3 kb)
10584_2012_625_MOESM2_ESM.pdf (47 kb)
ESM 2 (PDF 46.5 kb)
10584_2012_625_MOESM3_ESM.pdf (13 kb)
ESM 3 (PDF 13.3 kb)
10584_2012_625_MOESM4_ESM.pdf (94 kb)
ESM 4 (PDF 93.9 kb)
10584_2012_625_MOESM5_ESM.xls (86 kb)
ESM 5 (XLS 85.5 kb)
10584_2012_625_MOESM6_ESM.xlsx (67 kb)
ESM 6 (XLSX 66.7 kb)
10584_2012_625_MOESM7_ESM.xlsx (67 kb)
ESM 7 (XLSX 67.2 kb)
10584_2012_625_MOESM8_ESM.xlsx (13 kb)
ESM 8 (XLSX 12.6 kb)
10584_2012_625_MOESM9_ESM.xlsx (13 kb)
ESM 9 (XLSX 12.6 kb)
10584_2012_625_MOESM10_ESM.xlsx (13 kb)
ESM 10 (XLSX 12.5 kb)
10584_2012_625_MOESM11_ESM.xlsx (13 kb)
ESM 11 (XLSX 12.5 kb)


  1. Aerts JCJH, Botzen WJW (2011a) Climate-resilient waterfront development in New York City: bridging flood insurance, building codes, and flood zoning. Ann N Y Acad Sci 1227:1–82CrossRefGoogle Scholar
  2. Aerts J, Botzen W (2011b) Climate change impacts on pricing long-term flood insurance: a comprehensive study for the Netherlands. Glob Environ Chang 21(3):1045–1060CrossRefGoogle Scholar
  3. Bender M, Knutson T, Tuleya R, Sirutis J, Vecchi G, Garner S, Held I (2010) Modeled impact of anthropogenic warming on the frequency of intense Atlantic hurricanes. Science 327(5964):454–458CrossRefGoogle Scholar
  4. Bouwer LM, Crompton RP, Faust E, Höppe P, Pielke R Jr (2007) Confronting disaster losses. Science 318:753CrossRefGoogle Scholar
  5. Cummins D, Mahul O (2009) Catastrophe Risk Financing in Developing Countries: Principles for Public Intervention. World Bank, Washington DCGoogle Scholar
  6. Doherty N, Garven J (1995) Insurance cycles: interest rates and the capacity constraint model. J Bus 68(3):383–404CrossRefGoogle Scholar
  7. Emanuel K (2005) Increasing destructiveness of tropical cyclones over the past 30 years. Nature 436:686–688CrossRefGoogle Scholar
  8. Gron A (1994) Capacity constraints and cycles in property-casualty insurance markets. RAND J Econ 25(1):110–127CrossRefGoogle Scholar
  9. Hegerl GC, Zwiers FW, Braconnot P, Gillett NP, Luo Y, Marengo Orsini JA, Nicholls N, Penner JE, Stott PA (2007) Understanding and attributing climate change. In: Solomon S, Qin D, Manning M, Chen Z, Marquis M, Averyt KB, Tignor M, Miller HL (eds) Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USAGoogle Scholar
  10. Hoeppe P, Gurenko E (2006) Scientific and economic rationales for innovative climate insurance solutions. Climate Policy 6(6), 2006 doi: 10.1080/14693062.2006.9685627
  11. Jaffee D, Kunreuther H, Michel-Kerjan E (2010) Long term property Insurance. J Insur Regul 29(07):167–187Google Scholar
  12. Jones CP, Coulborne WL, Marshall J, Rogers SM (2006) Evaluation of the National Flood Insurance Program’s Building Standards. American Institutes for Research, Washington DC, pp 1–118Google Scholar
  13. Knutson T, McBride J, Chan J, Emanuel K, Holland G, Landsea C, Held I, Kossin J, Srivastava AK, Sugi M (2010) Tropical cyclones and climate change. Nat Geosci 3:157–163CrossRefGoogle Scholar
  14. Kunreuther H, Michel-Kerjan E (2011) At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes, Paperback edn. MIT Press, CambridgeGoogle Scholar
  15. Kunreuther H, Meyer RJ, Michel-Kerjan E (2012) Behavioral foundations of policy. In: Shafir E (ed) Behavioral Foundations of Policy. Princeton University Press, PrincetonGoogle Scholar
  16. Michel-Kerjan E (2010) Catastrophe economics: the national flood insurance program. J Econ Perspect 24(4):165–186CrossRefGoogle Scholar
  17. Michel-Kerjan E, Kunreuther H (2011) Reforming flood insurance. Science 333:408–409CrossRefGoogle Scholar
  18. Michel-Kerjan E, Kunreuther H (2012) Paying for Future Catastrophes. The New York Times, Sunday Review, November 25Google Scholar
  19. Pielke R Jr, Gratz J, Landsea C, Collins D, Saunders M, Musulin R (2008) Normalized hurricane damage in the United States: 1900–2005. Nat Hazards Rev 9(1):29–42CrossRefGoogle Scholar
  20. Ranger N, Niehörster F (2012) Deep Uncertainty in Long-term Hurricane Risk: Scenario generation and the implications for future climate experiments. Global Environmental Change 22(3):703–712Google Scholar
  21. Risk Management Solutions (RMS) (2010) Study of Florida’s Windstorm Mitigation Credits: Assessing the Impact on the Florida Insurance Market.
  22. Vecchi GA, Swanson KL, Soden BJ (2008) Whither hurricane activity? Science 322:687–689. doi: 10.1126/science.1164396 CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2012

Authors and Affiliations

  • Howard Kunreuther
    • 1
  • Erwann Michel-Kerjan
    • 1
  • Nicola Ranger
    • 2
  1. 1.Center for Risk Management and Decision ProcessesThe Wharton School, University of PennsylvaniaPhiladelphiaUSA
  2. 2.Centre for Climate Change Economics and Policy, London School of Economics and Political ScienceLondonUK

Personalised recommendations