The state of the art and future of climate risk insurance modeling

Abstract

This study provides a comprehensive review of the literature on climate risk insurance modeling to identify lessons learned and knowledge gaps to be addressed by future research. These models are increasingly relevant due to the rising losses attributable to climate change. Insurance models estimate risk for different perils and simulate risk‐related parameters for insurance schemes, such as premiums and deductibles. Most forward‐looking models indicate that climate change and socioeconomic developments highly exacerbate future risk and increase insurance premiums. Various studies recommend charging risk‐based premiums to incentivize adaptation efforts that limit this increase in climate risks. Other findings point toward introducing public–private insurance to cope with climate change and enhance risk spreading by introducing insurance purchase requirements or insurance products that cover multiple climate risks. Gaps that we identify in this literature include an underrepresentation of insurance assessments for developing countries and for hazards other than flooding. Additionally, we note a lack of research into insurance for non‐agricultural commercial sectors. Furthermore, less than half of the studies take a forward‐looking approach by incorporating climate change scenarios, and an even smaller percentage consider socioeconomic development scenarios. This limitation shows that current methods require additional development for assessing the effects of future climate risk on insurance. We recommend that future research develops such forward‐looking models, considers using a more refined spatial scale, broadens geographical and hazard coverage, and includes the commercial sector.