Climate Change-Related Disaster Risk Mitigation

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1		Maksims Feofilovs	--	1330	2024-03-19 16:41:45	\|
2	update references and layout	Rita Xu	Meta information modification	1330	2024-03-20 02:19:52	\|

This entry is adapted from the peer-reviewed paper 10.3390/risks12030043

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.

disaster risk reduction damage probabilities dynamic model

1. Climate Change and Natural Disasters

Climate change has increased the frequency and intensity of natural disasters, including floods, hurricanes, wildfires, and extreme weather events, and it poses significant risks to communities, ecosystems, and economies worldwide. Within the last 2 decades (i.e., 2000–2019), the Emergency Events Database (EM-DAT) (EM-DAT 2022) depicted a strong increase in disaster events (more than 7300), with more than 1.2 million deaths and more than 4 billion people affected (CRED and UNDRR 2020). Swiss Re analysis reports (Bevere et al. 2020) show the recurrence rates of similar flood occurrences have dramatically increased across South and Eastern Europe. Changes in forestry and agricultural land use, population expansion, and urbanization are thought to have contributed to the growing flood risk. In addition, research by (Berghuijs et al. 2019) found that from 1960 to 2010, the distance in Europe across which multiple rivers flood simultaneously increased by roughly 50%, contributing to large-scale flood impacts. Earthquakes came in second with losses of about EUR 29 billion, while flooding and storms were the most expensive hazards in Europe from 1998 to 2009, with losses totaling up to about EUR 52 billion for floods and EUR 44 billion for storms (European Environment Agency 2010).

The study of (Forzieri et al. 2016) suggests that land-use changes, urbanization, and climate change were reported as contributors to increasing flood risk, similar findings about an increase in the frequency of extreme events such as floods, heatwaves, droughts, windstorms, and wildfires across Europe are found. Urbanization and climate change, which will affect social and economic factors, will provide more difficulties for European cities in the near future (Carter 2011).

One of the biggest risks associated with the climate in Latvia is flooding. Due to the spring’s quick snowmelt, riverine flooding occurs every year in Latvia and can become disastrous. According to the event’s severity, the return rate is expected to range from once per 10 to 200 years. Together, these incidents result in the destruction of structures, loss of land and natural resources, interruptions to energy provision, and problems with the water management system. This circumstance demonstrates that some settlements in Latvia are not sufficiently “resilient” to natural disasters, so research must be performed to give a more comprehensive understanding of the issue associated with riverine floods (Feofilovs 2020). The yearly rise in storm surge damage to buildings in all coastal cities in Latvia between 2040 and 2070 may be close to EUR 1.5 million per year, according to the Latvian Adaptation Plan to Climate Change for the Time Period to 2030 (Cabinet of Ministers 2019).

A community’s capacity to withstand and recover from disasters can be improved by making proactive investments in hazard mitigation measures that assist in reducing catastrophic losses and damages. However, financial resources are frequently allocated disproportionately to support recovery initiatives after a disaster rather than using a few resources to finance pre-disaster mitigation activities. According to research, disaster mitigation investing is cost-effective because it typically generates $6 in savings for every $1 invested (Gall and Friedland 2020).

In this context, insurance mechanisms play a vital role in mitigating the impacts of climate change-related disasters by providing financial protection and promoting risk reduction measures, and innovative insurance mechanisms have emerged as essential tools to mitigate and manage the risks associated with climate change. Projects mitigating the effects of hazards on communities can now be financed using a wide range of financial and insurance mechanisms. Event-linked instruments, including Catastrophe Bonds, have increased in popularity in recent years (Vaijhala and Rhodes 2015). For example, catastrophe bonds can be used to transfer risks related to the possibility of disasters to the financial markets (2021) (Hofer et al. 2021) or like Resilience Bonds created to support resilient infrastructure initiatives, lowering large-scale risks in potential disasters (Clarvis et al. 2015; Vaijhala and Rhodes 2018).

This proactive role could be played by insurance companies implementing different types of mechanisms. Insurance mechanisms offer indispensable tools to manage the risks associated with climate change (Hofer et al. 2021). By facilitating risk transfer, encouraging risk reduction measures, promoting collaboration, and fostering innovation, these mechanisms contribute to building resilience and ensuring sustainable development in the face of climate challenges. Policymakers, insurers, and communities must work together to enhance the accessibility, affordability, and effectiveness of insurance mechanisms, ultimately safeguarding societies against climate change-related risks and supporting a more climate-resilient future (Colker 2019).

2. Role of Insurance Sector in Mitigating and Adapting to Climate Change-Related Risks

The insurance sector has a proactive role in mitigating and adapting to climate change-related risks. Insurance mechanisms begin with a comprehensive risk assessment to mitigate climate change-related risks effectively. This involves analyzing historical disaster data, studying climate projections, and evaluating vulnerability assessments considering factors such as historical data, climate models, vulnerability assessments, and exposure analysis. Insurance providers can accurately price policies and determine coverage levels by understanding the frequency, severity, and spatial distribution of risks. Proper risk pricing ensures that policyholders pay premiums commensurate with the level of risk they face, thereby incentivizing risk reduction measures (Schanz 2021; Hennighausen et al. 2023). Through risk management advice and guidelines, insurers also encourage policyholders to implement measures that mitigate climate-related risks, thus fostering resilience.

Insurance mechanisms have the potential to incentivize risk reduction and adaptation measures. Insurers can offer reduced premiums or additional coverage benefits to policyholders who adopt climate adaptation strategies, invest in resilient infrastructure, or implement sustainable practices. By encouraging proactive measures, insurance mechanisms contribute to building climate resilience, reducing vulnerability, and promoting long-term sustainability (Coffee 2020).

Parametric or index-based insurance products have emerged as innovative mechanisms to enhance the efficiency and effectiveness of climate risk mitigation. These products utilize predetermined triggers, such as wind speed, rainfall levels, or temperature thresholds, to determine the payout amounts. By removing the need for complex claims processing and assessments, parametric insurance enables faster response and timely financial support to affected policyholders. It also reduces administrative costs for insurance providers, enabling them to offer coverage to more individuals and businesses in high-risk areas (Abdi et al. 2022).

By offering lower premiums or other benefits, such as deductible discounts or specialized coverage options, insurance providers encourage policyholders to implement climate adaptation and mitigation strategies. Insurance mechanisms can play a pivotal role in incentivizing risk reduction measures. These measures may include constructing resilient infrastructure, adopting sustainable land management practices, implementing early warning systems, or investing in disaster-resistant building materials. Insurance mechanisms foster a proactive approach to risk reduction through such incentives and enhance overall community resilience (Colker 2019; Clarvis et al. 2015).

Insurers engage with policyholders, urban communities, and local authorities to raise awareness about climate change risks, insurance options, and risk reduction measures (Robinson et al. 2021). Through educational campaigns, workshops, and community forums, stakeholders are empowered to make informed decisions, enhance their risk perception, and actively participate in building urban resilience (Roder et al. 2019). By combining resources, knowledge, and expertise, stakeholders can create integrated approaches to disaster risk reduction and ensure that insurance mechanisms align with broader climate change adaptation strategies (Schanz 2021).

By continuously assessing changes in risk profiles, insurance uptake rates, claims experience, and the overall resilience of insured assets, stakeholders can identify areas for improvement and make necessary adjustments. This iterative process helps refine the insurance mechanisms, enhance their efficiency, and adapt to evolving climate change risks (Li and Liu 2023). Insurers encourage risk reduction and resilience-building practices by offering lower premiums or tailored coverage options to policyholders who implement climate adaptation measures, such as green roofs, permeable pavements, or flood-resistant construction (Vaijhala and Rhodes 2015; Kunreuther et al. 2016).

Governments play a vital role in supporting insurance mechanisms against climate change risks (Hudson et al. 2019). Policymakers can facilitate the development and implementation of supportive regulations, tax incentives, and risk-sharing frameworks. Public-private partnerships foster collaboration between insurers and governments, enabling the design of comprehensive insurance solutions that address the unique challenges of climate change and promote inclusive coverage (Clarvis et al. 2015; Frisari et al. 2020).

References

EM-DAT. 2022. The OFDA/CRED International Disaster Database. Brussels: UCLouvain. Available online: https://www.emdat.be/ (accessed on 30 June 2023).
Centre for Research on the Epidemiology of Disasters (CRED), and United Nations Office for Disaster Risk Reduction (UNDRR). 2020. Human Cost of Disasters, an Overview of the Last 20 Years (2000–2019). Geneva: United Nations Office for Disaster Risk Reduction (UNDRR).
Bevere, Lucia, Michael Gloor, and Adam Sobel. 2020. Natural Catastrophes in Times of Economic Accumulation and Climate Change. Zurich: Swiss Re Sigma.
Berghuijs, Wouter R., Scott T. Allen, Shaun Harrigan, and James W. Kirchner. 2019. Growing Spatial Scales of Synchronous River Flooding in Europe. Geophysical Research Letters 46: 1423–28.
European Environment Agency. 2010. Mapping the Impacts of Natural HAZARDS and Technological Accidents in Europe. Technical Report No. 13. Copenhagen: European Environment Agency.
Forzieri, Giovanni, Luc Feyen, Simone Russo, Michalis Vousdoukas, Lorenzo Alfieri, Stephen Outten, Mirco Migliavacca, Alessandra Bianchi, Rodrigo Rojas, and Alba Cid. 2016. Multi-hazard assessment in Europe under climate change. Climate Change 137: 105–19.
Carter, Jeremy G. 2011. Climate change adaptation in European cities. Current Opinion in Environmental Sustainability 3: 193–98.
Feofilovs, Maksims. 2020. Dynamics of Urban Resilience to Natural Hazards. Ph.D. Thesis, RTU, Riga, Latvia; 179p.
Cabinet of Ministers. 2019. Latvian Adaptation Plan to Climate Change for Time Period to 2030. Available online: https://likumi.lv/ta/en/en/id/308330 (accessed on 30 June 2023).
Gall, Melanie, and Caro J. Friedland. 2020. If Mitigation Saves $6 Per Every $1 Spent, Then Why Are We Not Investing More? A Louisiana Perspective on a National Issue. Natural Hazards Review 21: 04019013.
Vaijhala, Shalini, and James Rhodes. 2015. Leveraging Catastrophe Bonds As a Mechanism for Resilient Infrastructure Project Finance. Available online: www.refocuspartners.com (accessed on 30 June 2023).
Hofer, Lorenzo, Paolo Gardoni, and Mariano Angelo Zanini. 2021. Risk-based CAT bond pricing considering parameter uncertainties. Sustainable and Resilient Infrastructure 6: 315–29.
Clarvis, Margot Hill, Erin Bohensky, and Masaru Yarime. 2015. Can resilience thinking inform resilience investments? Learning from resilience principles for disaster risk reduction. Sustainability 7: 9048–66.
Vaijhala, Shalini, and James Rhodes. 2018. Resilience Bonds: A Business-Model for Resilient infrastructure. Field Actions Science Reports , Special Issue 18|2018. Available online: http://journals.openedition.org/factsreports/4910 (accessed on 30 June 2023).
Colker, Ryan M. 2019. Optimizing Community Infrastructure: Resilience in the Face of Shocks and Stresses. In Optimizing Community Infrastructure: Resilience in the Face of Shocks and Stresses. Amsterdam: Elsevier.
Schanz, Kai-Uwe. 2021. Future Urban Risk Landscapes: An Insurance Perspective. Zürich: The Geneva Association.
Hennighausen, Hannah, Yanjun Liao, Christoph Nolte, and Adam Pollack. 2023. Flood insurance reforms, housing market dynamics, and adaptation to climate risks. Journal of Housing Economics 62: 101953.
Coffee, Joyce. 2020. Financing Resilient Infrastructure. In Optimizing Community Infrastructure: Resilience in the Face of Shocks and Stresses. Amsterdam: Elsevier, pp. 101–21.
Abdi, Mukhtar Jibril, Nurfarhana Raffar, Zed Zulkafli, Khairudin Nurulhuda, Balqis Mohamed Rehan, Farrah Melissa Muharam, Nor Ain Khosim, and Fredolin Tangang. 2022. Index-based insurance and hydroclimatic risk management in agriculture: A systematic review of index. International Journal of Disaster Risk Reduction 67: 102653.
Robinson, Peter John, W. J. Wouter Botzen, Sem Duijndam, and Aimée Molenaar. 2021. Risk communication nudges and flood insurance demand. Climate Risk Management 34: 100366.
Roder, Giulia, Paul Hudson, and Paolo Tarolli. 2019. Flood risk perceptions and the willingness to pay for flood insurance in the Veneto region of Italy. International Journal of Disaster Risk Reduction 37: 101172.
Li, Qiang, and Wei Liu. 2023. Impact of government risk communication on residents’ decisions to adopt earthquake insurance: Evidence from a field survey in China. International Journal of Disaster Risk Reduction 91: 103695.
Kunreuther, Howard, Michel-Kerjan Erwann, and Tonn Gina. 2016. Insurance, Economic Incentives and other Policy Tools for Strengthening Critical Infrastructure Resilience: 20 Proposals for Action. Philadelphia: The Wharton School, University of Pennsylvania.
Hudson, Paul, W. J. Wouter Botzen, and Jeroen C. J. H. Aerts. 2019. Flood insurance arrangements in the European Union for future flood risk under climate and socioeconomic change. Global Environmental Change 58: 101966.
Frisari, Giovanni Leo, Anaitée Mills, Mariana Silva, Marcel Ham, Elisa Donadi, Christine Shepherd, and Irene Pohl. 2020. Climate Resilient Public Private Partnerships: A Toolkit for Decision Makers. Washington, DC: IDB.

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Maksims Feofilovs

Andrea Jonathan Pagano

Emanuele Vannucci

Marina Spiotta

Francesco Romagnoli

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Update Date: 22 Mar 2024

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1. Climate Change and Natural Disasters

2. Role of Insurance Sector in Mitigating and Adapting to Climate Change-Related Risks

References