What role for “long-term insurance” in adaptation? An analysis of the prospects for and pricing of multi-year insurance contracts

Trevor Maynard and Nicola Ranger

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Multi-year insurance has been proposed as a tool to incentivise policy-holders to invest in property-level 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 some arguments made in respect of 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 per cent higher for a 10-year contract than an annual contract and the annual premium around 5.5 per cent 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, we conclude that other tools, such as risk-based premiums and loans for adaptation tied to the property, have greater potential.

Keywords: adaptation; climate change; insurance economics; long-term insurance; multi-year insurance contracts; risk reduction (search for similar items in EconPapers)
JEL-codes: G2 G22 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

Published in Geneva Papers on Risk and Insurance: Issues and Practice, 2012, 37(2), pp. 318-339. ISSN: 1018-5895

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