The robustness of flood insurance regimes given changing risk resulting from climate change

TLDR

Climate change is altering flood risk, challenging diverse global flood insurance models that differ in consumer structure and risk transfer mechanisms. The study reviews international flood insurance schemes against criteria of risk knowledge, insurable population availability, and insurer solvency. Insurers remain solvent by excluding high‑risk markets or diversifying, yet rising flood risk could threaten solvency unless adjusted; market‑based and hybrid schemes offer diversification and flexibility, but risk‑based pricing may reduce affordability, so state partnership is essential for continuity, equity, and mitigation incentives.

Abstract

The changing risk of flooding associated with climate change presents different challenges for the different flood insurance market models in use around the world, which vary in respect of consumer structure and their risk transfer mechanism. A review of international models has been undertaken against three broad criteria for the functioning and sustainability of a flood insurance scheme: knowing the nature of the insurable risk; the availability of an insurable population; and the presence of a solvent insurer. The solvency of insurance markets appears strong, partly because insurers and reinsurers can choose to exclude markets which would give rise to insolvency or can diversify their portfolios to include offsetting perils. Changing risk may threaten solvency if increasing risk is not recognised and adjusted for but insurability of flood risk may be facilitated by the use of market based and hybrid schemes offering greater diversification and more flexibility. While encouragement of mitigation is in theory boosted by risk based pricing, availability and affordability of insurance may be negatively impacted. This threatens the sustainability of an insurable population, therefore the inclusion of the state in partnership is beneficial in ensuring continuity of cover, addressing equity issues and incentivising mitigation.