What role for ‘long-term’ insurance in adaptation? An analysis of the prospects for and pricing of multi-year insurance contracts
Multi-year insurance has been proposed as a tool to incentivise policyholders to invest in property level adaptation. In a world of rising natural catastrophe risks, such autonomous adaptations could have significant benefits for the property-owner, the insurer and society.
We review the arguments for and against multi-year contracts and provide new analyses on their price implications. We conclude that even under conditions of known and stationary risk, initial capital requirements could be around 50% higher for a 10-year contract than an annual contract and the annual premium around 5.5% higher; in the real world of changing and uncertain risks, premiums would be even higher.
We also conclude that multi-year contracts have several additional disadvantages that are likely to limit their demand and availability in the general retail insurance market. For adaptation, a preliminary analysis of existing evidence suggests that other tools, such as risk-based premiums and loans for adaptation tied to the property, have greater potential.
Trevor Maynard and Nicola Ranger