Long-Term Insurance and Climate Change

This paper examines the role that long-term insurance (LTI) policies coupled with mitigation measures can play in reducing losses from natural disasters. Two principles— Premiums Reflecting Risk; and Dealing with Equity and Affordability Issues—are advocated for developing LTI. A long-term policy encourages homeowners to invest in cost-effective mitigation by spreading the upfront costs of these measures over time through long-term loans while paying lower premiums due to the reduced claims costs that insurers will incur in the future. The paper proposes modifying the National Flood Insurance Program so it provides long-term policies given the large number of homeowners who cancel their annual insurance policies after several years of not making any claims. For private insurers to price LTI, there is a need to simulate alternative scenarios reflecting the uncertainties in losses over time due to climate change and sea level rise. The paper proposes the types of scenarios that need to be examined and notes a series of open issues that require further discussion by researchers and key stakeholders before LTI can be offered.