Monetary valuation of insurance against climate change risk

Climate change is expected to increase the frequency and severity of certain natural catastrophes, such as flooding. This is likely to increase the willingness to pay (WTP) for natural catastrophe insurances, even though it is uncertain how large this effect will be. In various countries the public sector offers partial compensation of damage caused by natural catastrophes, which may reduce the need for private insurance coverage and hamper the development of insurance markets. We present a stated preference survey using choice modeling with mixed logit estimation methods to examine the effects of climate change and availability of government compensation on the demand for flood insurance by Dutch homeowners. Currently, insurance against flood damage is not offered in the Netherlands. We estimate the dependence of WTP on prior risk perceptions, actual measures of risk, risk aversion, and socio-economic characteristics. Results indicate that opportunities for a (partly) private flood insurance market exist.