Insurance and Business Denmark
Vulnerabilities - Denmark
The insurance-related impacts of climate change (for example, higher temperatures, more frequent and stronger rainfall, more frequent and possibly stronger storms and changes in the general sea level) have not been subject to systematic research by Danish insurance companies. Internationally, on the other hand, there has been increasing awareness in recent years of the insurance-related problems stemming from climate change. At the same time, it can be noted that in its initial phases, the work has led to only few practical initiatives (for example, Insurance Scheme AquaPol in the Netherlands, which offers insurance coverage against damage caused by "rain storm") (1).
The knowledge direct insurance companies and reinsurance companies have today about the economic impacts of climate change in the future is insufficient, and more relevant data and models for price setting are especially lacking. In this respect, premium-setting based on expected developments could come into play, and the development of new financial instruments of risk transfer could be realized (1).
Since the 1991 Flood Act, the flood insurance scheme in Denmark is a public provided and (partly) publicly managed, tax-financed compensation scheme. The only tasks to be performed by insurance companies are to collect flood tax, receive claims forms from people having suffered losses and provide expert assistance when losses are assessed. As a consequence, all private properties are insured, and insured assets include all residential homes, personal property, businesses, and commercial property (2).
Insured losses - Globally
Globally, insured and total property losses are rising faster than premiums, population, or economic growth; inflation adjusted economic losses from catastrophic events rose by 8-fold between the 1960s and 1990s and insured losses by 17-fold. Large catastrophic events cause less damage in an average year than the aggregated impacts of relatively small events (a 40/60 ratio globally) (9).
In the United States, averaged over the past 55 years, weather-related events have been responsible for 93% of all catastrophe events, 83% of the economic damages of natural disasters, and 87% of the insured losses. ... The observed upward trend in losses is consistent with what would be expected under climate change and with demographic factors (9).
Vulnerabilities - Overview
The insurability of natural disasters and extreme weather events may be affected by increases in the frequency, severity, or unpredictability of these events. ... Climate change presents various challenges to insurability. These include technical and market-based risks (9):
- Shortening times between loss events, such as more hurricanes per season,
- Changing absolute and relative variability of losses,
- Changing structure of types of events,
- Shifting spatial distribution of events,
- Damages that increase exponentially or nonlinearly with weather intensity,
- Widespread geographical simultaneity of losses (e.g. from tidal surges arising from a broad die-off of protective coral reefs or disease outbreaks on multiple continents),
- Increased difficulty in anticipating "hot spots" (geographic and demographic) for particular hazards,
- More single events with multiple, correlated consequences. This was well evidenced in the pan-European heat catastrophe of 2003. Immediate or delayed impacts included extensive human morbidity and mortality, wildfire, massive crop losses, and the curtailment of electric power plants due to the temperature or lack of cooling water, and
- More hybrid events with multiple consequences (e.g. El Nino-related rain, ice storms, floods, mudslides, droughts, and wildfires).
- Historically-based premiums that lag behind actual losses,
- Failing to foresee and keep up with changing customer needs arising from the consequences of climate change,
- Unanticipated changes in patterns of claims, and associated difficulty in adjusting pricing and reserve practices to maintain profitability,
- Responses of insurance regulators,
- Reputation risks falling on insurers who do not, in the eyes of consumers, do enough to prevent losses arising from climate change, and
- Stresses unrelated to weather but conspiring with climate change impacts to amplify the net adverse impact. These include draw-downs of capital and surplus due to earthquakes or terrorist attacks and increased competition from self-insurance or other competing methods of risk-spreading.
Pressure on insurance affordability & availability under climate change
Extreme weather events have already precipitated contraction of insurance coverage in some markets, and the process can be expected to continue if the losses from such events increase in the future. Impacts vary, of course, depending on the specific circumstances, and can be relatively minor (gradual price increases) to more significant. For the United States, the following outlook has been presented for different types of issues (9):
- Flood - currently a mix of public/private insurance and risk sharing. Under climate change, insurability problems may extend from the present personal and small commercial lines into larger commercial lines.
- Windstorm—a largely insured risk at present. There are already considerable insurability problems and associated changes in terms and pricing, non-renewals, market withdrawl, etc. This could increase dramatically under climate change, resulting in shifting of losses to governments and consumers.
- Agriculture and livestock—currently a public/private insurance partnership. Climate change will stress this sector considerably, with potential for impacts due to drought, flood, pests, or other events on a scale with the Great Dust Bowl of the 1930s.
- Wildfire—currently largely privately insured. More retention of risk by purchasers of insurance and more involvement by state governments is anticipated, while insurers raise deductibles and reduce limits of liability and scope of coverage.
- Mold and moisture damage—largely commercially insured until the crisis emerged a few years ago. Now, many states have exclusions.
- Earth movement and coastal erosion—primarily insured by government, if at all. With permafrost melt, subsidence of dry soils, sinkholes will become more prevalent, as will mudslides and property losses from coastal erosion. Government programs covering storm-surge-driven losses on eroded property could be overwhelmed with losses under climate change, with the result of more retention by property owners.
- Health impacts—currently largely privately insured. An insurability crisis under climate change is not anticipated. Impacts will manifest in the form of elevated health insurance prices.
Vulnerabilities - Europe
It is estimated that losses from weather events are doubling globally every 12 years. Even though the observed increase in losses is dominated by socio-economic factors (such as population growth, increased number of habitations in vulnerable areas, increased wealth, increased amount and value of vulnerable infrastructure), there is evidence that changing patterns of natural disasters are also drivers (3). It is however not known how much of this increase in losses can be attributed to anthropogenic climate change (4). After accounting for changes in population and wealth, it has been shown that changes in extreme weather events may be responsible for a growth in losses by about 2% a year since the 1970s (8).
In Europe, 64% of all loss events since 1980 are directly attributable to weather and climate events (storms, floods and heat-waves) and 25% to wild fires, cold spells, landslides and avalanches, which are also linked to weather and climate. 95% of the overall losses and 78% of all deaths caused by disastrous events result from such weather and climate-related events. The annual average number of these weather- and climate-related events in Europe increased during the period 1998–2007 by about 65% compared with the 1980s (5).
Swiss Re has estimated that in Europe the costs of a 100-year storm event could double by the 2080s with climate change (to EUR 40 billion compared with EUR 20 billion today), while average storm losses are estimated to increase by 16–68% over the same period (3). Analyses of long-term records of flood losses indicate that societal and economic factors have played an important role in the observed upward trends (6).
According to an estimate by the Reinsurance Association of America (RAA), 50% of insured losses in the world within the last 40 years have been the consequence of natural catastrophes in the 1990s. Insurance experts have warned that large regions of the world may be recategorised as ineligible for insurance, because changes in weather caused by climate change (such as heat waves and hurricanes) continue at an accelerating pace (7).
Climate change is expected to lead to an increase in compensable damage, which will contribute to increased insurance premiums. This means that extreme events will result in an increased level of risk in the insurance sector. Climate change may lead to increased costs and maybe even the bankruptcy of insurance companies (7).
Flood risk insurance
Insurance and compensation systems for flood risk in Europe have been divided into three categories (10):
- Traditional (private) insurance systems. This system is in place in most European countries (in 15 out of 19 studied countries). Systems are set up and managed by private companies, where the cover is financed from premiums that are paid before the event (ex ante). Some of these systems may have support from the government, for instance through state-guaranteed reinsurance. Countries where at least half the population has taken out flood insurance are: Portugal, Spain, France, the United Kingdom, Hungary, Norway and Sweden. Countries where less than half of the population has taken out flood insurance are: Italy, Greece, Austria, Slovakia, the Czech Republic Germany, Poland, Finland;
- Insurance or pooling systems in which the government has a considerable role, through setting up and managing the pool. Cover is provided through ex ante premiums or ex ante taxes on insurance policies. This is the case in Belgium, Denmark and Switzerland. In Belgium, however, a compulsory insurance system has been put in place since late 2005;
- Systems administered by the government, consisting of ex post compensation of flood losses. These systems are not considered to be insurance, as the basic property of ex ante premium or tax collection is not present. Rather, loss compensation is paid from tax money, either ad hoc or through budget reservations. Out of 19 studied European countries this system is only in place in the Netherlands.
The references below are cited in full in a separate map 'References'. Please click here if you are looking for the full references for Denmark.
- Danish Government (2008)
- Hallegatte et al. (2008)
- UNEP FI (2006), in: EEA, JRC and WHO (2008)
- Höppe et al.(2006), in: EEA, JRC and WHO (2008)
- EEA, JRC and WHO (2008)
- Pielke Jr and Downton (2000); Mills (2005); Barredo (2007), in: EEA, JRC and WHO (2008)
- Marttila et al. (2005)
- Muir-Wood et al. (2006), in: Ward et al. (2008)
- Mills et al. (2005)
- Bouwer et al. (2007)