Applying Life Insurance Principles to Coastal Property Insurance to Incentivize Adaptation to Climate Change

Abstract

Current levels of greenhouse gases will result in significant sea level rise in the future, irrespective of the success of any future mitigation efforts. Paleoclimate and geologic data from past periods of rising sea level show that low lying areas, especially river deltas which are home to half a billion people, will be inundated. The best way to represent this risk through insurance is to apply the human-life insurance model to coastal property insurance. Human-life insurance is based on the assumption that every insured will die. Because the risk of death increases with age, the cost of insurance increases with age. Property-life insurance assumes that coastal properties will be lost at an unknown future date determined by the rate of sea level rise and patterns of catastrophic storms. As with human-life insurance, premiums would increase on a regular schedule through time. This predictable premium increase would create a powerful risk signal to incentivize adaptation.

Keywords: climate change, global warming, insurance, property casualty insurance, NFIP, flood insurance, life insurance, property insurance, extreme weather, flooding, hurricanes, Hurricane Sandy, Hurricane Katrina, coastal land loss

JEL Classification: R52, R53, R31, R38, R23, R14, Q48, Q32, Q15, Q33, K32, K11, I18, H71, H77, H53, H54, H31, H32, G22