Climate change impacts on pricing long-term flood insurance: A comprehensive study for the Netherlands

Recently long-term flood insurance contracts with a duration of 5, 10 or 15 years have been proposed as a solution for covering flood risk and mitigating increasing flood losses. Establishing a long-term relation between the policyholder and the insurer can provide better incentives to reduce risk through undertaking damage mitigation measures. However, the uncertainty about the development of future flood risk in the face of climate and socio-economic change may complicate insurers’ rate-setting of long-term contracts. This issue has been examined in this study by estimating the effects of these changes on flood risk and pricing flood insurance premiums of short- and long-term flood insurance contracts in all (53) dike-ring areas in the Netherlands. A broad range of simulations with hydrological and flood damage models are used to estimate the future development of flood risk and premiums. In addition, the long-term development of insurance funds is estimated with a spatial “Climate Risk Insurance Model (CRIM)” for a private insurance arrangement and for a ‘three-layered’ public-private insurance program. The estimation of flood insurance premiums of long-term insurance contracts reveals fundamental problems. One is that there is an incentive for either the consumer or the insurer to prefer short-term rather than long-term contracts in the face of climate-related uncertainty. Therefore, it seems advisable to examine the introduction of one-year flood insurance contracts in the Netherlands, at least until the large uncertainties with climate and socio-economic change on flood risk have been resolved. The estimations performed with the Climate Risk Insurance Model indicate that a private insurance fund could have difficulties with building up enough financial reserves to pay for flood damage, while the layered public-private insurance scheme is more robust.