Climate Change-Related Disaster Risk Mitigation through Innovative Insurance Mechanism: A System Dynamics Model Application for a Case Study in Latvia

Maksims Feofilovs (), Andrea Jonathan Pagano, Emanuele Vannucci, Marina Spiotta and Francesco Romagnoli
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Maksims Feofilovs: Institute of Energy Systems and Environment, Riga Technical University, Azenes iela 12/1, LV-1048 Riga, Latvia
Andrea Jonathan Pagano: Institute of Energy Systems and Environment, Riga Technical University, Azenes iela 12/1, LV-1048 Riga, Latvia
Emanuele Vannucci: Department of Business and Management, Pisa University, Cosimo Ridolfi Street 10, 56124 Pisa, Italy
Marina Spiotta: Department of Business and Management, University of Piemonte Orientale, Ettore Perrone Street 18, 28100 Novara, Italy
Francesco Romagnoli: Institute of Energy Systems and Environment, Riga Technical University, Azenes iela 12/1, LV-1048 Riga, Latvia

Risks, 2024, vol. 12, issue 3, 1-23

Abstract: This study explores how the System Dynamics modeling approach can help deal with the problem of conventional insurance mechanisms by studying the feedback loops governing complex systems connected to the disaster insurance mechanism. Instead of addressing the disaster’s underlying risk, the traditional disaster insurance strategy largely focuses on providing financial security for asset recovery after a disaster. This constraint becomes especially concerning as the threat of climate-related disasters grows since it may result in rising long-term damage expenditures. A new insurance mechanism is suggested as a solution to this problem to lower damage costs while safeguarding insured assets and luring new assets to be protected. A local case study utilizing a System Dynamics stock and flow model is created and validated by examining the model’s structure, sensitivity analysis, and extreme value test. The results of the case study performed on a city in Latvia highlight the significance of effective disaster risk reduction strategies applied within the innovative insurance mechanism in lowering overall disaster costs. The logical coherence seen throughout the analysis of simulated scenario results strengthens the established model’s plausibility. The case study’s findings support the innovative insurance mechanism’s dynamic hypothesis and show the main influencing factors on the dynamics within the proposed innovative insurance mechanism. The information this study can help insurance firms, policy planners, and disaster risk managers make decisions that will benefit local communities and other stakeholders regarding climate-related disaster risk mitigation.

Keywords: disaster risk reduction; damage probabilities; dynamic model; probabilistic approach; causal loop diagrams; investment; natural hazard (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2024
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