Regional Inequalities in Flood Insurance Affordability and Uptake under Climate Change

Max Tesselaar, Wouter Botzen, Toon Haer, Paul Hudson, Timothy Tiggeloven and Jeroen C. J. H. Aerts
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Max Tesselaar: Institute for Environmental Studies, Vrije Universiteit, 1081HV Amsterdam, The Netherlands
Toon Haer: Institute for Environmental Studies, Vrije Universiteit, 1081HV Amsterdam, The Netherlands
Paul Hudson: Institute of Environmental Science and Geography, University of Potsdam, 14476 Potsdam-Golm, Germany
Timothy Tiggeloven: Institute for Environmental Studies, Vrije Universiteit, 1081HV Amsterdam, The Netherlands
Jeroen C. J. H. Aerts: Institute for Environmental Studies, Vrije Universiteit, 1081HV Amsterdam, The Netherlands

Sustainability, 2020, vol. 12, issue 20, 1-30

Abstract: Flood insurance coverage can enhance financial resilience of households to changing flood risk caused by climate change. However, income inequalities imply that not all households can afford flood insurance. The uptake of flood insurance in voluntary markets may decline when flood risk increases as a result of climate change. This increase in flood risk may cause substantially higher risk-based insurance premiums, reduce the willingness to purchase flood insurance, and worsen problems with the unaffordability of coverage for low-income households. A socio-economic tipping-point can occur when the functioning of a formal flood insurance system is hampered by diminishing demand for coverage. In this study, we examine whether such a tipping-point can occur in Europe for current flood insurance systems under different trends in future flood risk caused by climate and socio-economic change. This analysis gives insights into regional inequalities concerning the ability to continue to use flood insurance as an instrument to adapt to changing flood risk. For this study, we adapt the “Dynamic Integrated Flood and Insurance” (DIFI) model by integrating new flood risk simulations in the model that enable examining impacts from various scenarios of climate and socio-economic change on flood insurance premiums and consumer demand. Our results show rising unaffordability and declining demand for flood insurance across scenarios towards 2080. Under a high climate change scenario, simulations show the occurrence of a socio-economic tipping-point in several regions, where insurance uptake almost disappears. A tipping-point and related inequalities in the ability to use flood insurance as an adaptation instrument can be mitigated by introducing reforms of flood insurance arrangements.

Keywords: climate change; flood risk management; insurance; socio-economic tipping-point; adaptation; partial equilibrium modeling (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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