Insurance of Climate Risks - Between Private Provision and Public Intervention

On November 22, 2021, the Forum Climate Eco­nomics 10 "Insurance of Climate Risks - Between Private Provision and Public Inter­ven­tion" took place in presence for the first time in almost two years. In strict com­pli­ance with the 2Gplus rules, the federal state rep­re­sen­ta­tion of Schleswig-Holstein in Berlin provided an appropriate setting for around 50 guests from politics, business, civil society and science. They discussed current issues surrounding the topic of insurance against extreme weather events as an option for adapting to climate change: What role can and should private and public actors play in insuring against climate risks? How do insurance policies provide incentives for the private sector to adapt to climate change? Are insurance solutions socially just?

The new coalition should issue a mandate to examine compulsory insurance!

• In the status quo in Germany, "voluntary in­sur­ance markets with state backing" led to a comparatively low insurance density. In anticipation of state aid in the event of a catastrophe, there is little incentive to pro­vide for one's own risk. At the same time, the ad hoc nature of government aid payments increases uncertainty for prop­er­ty owners, and portfolios in high-risk situations often remain without sufficient protection due to risk-based premiums.
• Options for a redesign would be the intro­duc­tion of compulsory insurance, which would allow for a high insurance density, but is considered to be constitutionally problematic. Therefore, the opt-out option already presented by Jörg Asmussen would be a more elegant solution. Furthermore, government information campaigns on the risk situation, insurance options and tax-financed catastrophe funds should be taken into account.

Index-based weather insurance in the Global South: Are the great expectations being fulfilled?

• Index-based insurance not only strengthens the resilience of smallholder households to extreme weather events, it also enables more profitable investments by households and better access to credit. The success of an insurance product depends on the informative value of the chosen index. In the practical application in the field of development cooperation, however, index-based insurance as an instrument against extreme weather events must be embedded in a broader adaptation strategy.
• The discussion on linking insurance offerings to private adaptation and sustainable agricultural practices, identified the fluid transition between private sector insurance solutions and basic social welfare provided by the state as a critical issue, especially in the case of heavily subsidized insurance premiums.

Crop losses due to climate change in agriculture: The role of insurance solutions

• Insurance economics concepts such as accumulation risk, asymmetric in­for­ma­tion, adverse selection, and avail­abil­ity bias were introduced to the discussion and advantages of index-based insurance were explained. It was noted that crop loss in­sur­ance does not necessarily reduce the holistic en­tre­pre­neur­ial performance risk, as cropping decisions and self-reliant risk hedging could be influenced by it.
• In the policy approach to government sup­port for risk management in ag­ri­cul­ture, subsidized premiums aimed to pro­mote insurance instruments and thus successively replace ad hoc aid disbursements were endorsed.

Consensus: Careful and informed insurance design is critical to the effectiveness and in­cen­tive compatibility of insurance solutions.

Panel discusses the role of private and public actors in insuring against extreme weather events

In the agricultural sector, special attention must be paid to insurance design. For ex­am­ple, a broad range of insurance products could counteract undesirable production dis­tor­tions for society as a whole, which are caused by specialization in individual prod­ucts insured against crop failure. Overall, in­sur­ance against extreme weather events (such as hail) works well in agriculture, but not so in areas with high accumulation risks (such as drought). It remained questionable to what extent government intervention, aid payments and subsidies could remedy this situation.

The topic of natural hazard insurance was also taken up in the panel discussion. Following the unexpected effects of Bernd, insurance models are currently being adapted to the new conditions for determining risk-based premiums. In terms of distribution policy, it remains to be clarified how affected parties whose properties in non-risk areas were nonetheless damaged by the flood are to be compensated. Should they (be allowed to) rebuild their homes on site, or should they be compensated if they are denied to do so?