Insurance experts create new ways to insure, price, underwrite, and settle risks.
A sample project; to improve flood management to prevent risk; planning mechanisms to prevent additional construction in flood plains; improving flood warnings and emergency preparedness; and developing “climate friendly” insurance products.
For insurers, water risk usually means opportunity due to increased risk of declining water quality, floods and droughts, and water stress and shortage. Insuring against water risk and customizing insurance contracts can be extremely profitable to insurance companies. The key categories of risk related to lack of water and drought include:
Insured risk such as crop insurance, as the value of commodities rise; Fire - the 2007 California brushfire cost $1.1 billion and destroyed 3,000 homes. The trend is upward; houses are built in fire-prone areas; the average annual insured loss from wildfires has doubled in the past ten years.
Indirect risk such as business interruption in power curtailment due to lack of water cooling. Business interruption insurance is usually written as a customized contract; covering losses due to power cuts and interrupted supplies. Smaller coverages may be issued for supermarkets, restaurants, shipping and transportation, and household refrigerator/freezer contents.
Unusual events such as property and casualty risk due to floods, water leakage, incorrect storage of chemicals, drought leading to shrinking of foundations in clay soils, cracking drainage pipes, flood risk in homes that already have had subsidence losses.
Climate Change and Insurance
The climate change is expected to lead to increased risk related to water. Insurers are operating on the assumption that a warmer global climate will lead to increased losses. Expected effects of global warming include extreme weather such as floods, extreme temperatures, hailstorms, windstorms, severe storms, and reduced rainfall related to drought and water shortage.
Losses from natural catastrophes, such as floods, will increase demand for insurance. The insurers and re-insurers, are promoting the notion of public-private partnerships to control risk and loss as average temperatures rise. Public-private system of crop insurance is a potential model and many countries have adopted various private-public partnership measures in insurance to mitigate losses related to climate change.