Climate change has been a hot topic for many years now, but one seldom hears it being discussed in the mass media from an insurance perspective. Climate change has become a very real problem to insurers, specifically reinsurers, since the number of natural disasters has escalated over the years, leading to more and more claims needing to be paid out.
A good example to look at is the American National Flood Insurance Program (NFIP), which funds the claims paid out to those affected by flooding. In the past, this scheme was not nearly as it has become. As such, the scheme is re-assessing its current structure with the aim of reforming so as to reduce the burden on US taxpayers.
Key to these reforms are two factors. The first is the introduction of risk-based pricing to the current system, which would not only increase the purchasing of flood insurance, but also the choices available to the consumers as to the degree of comprehensiveness which they desire.
Secondly, the scheme wants to tap into private risk markets and reinsurance capital. This will build the pathway which will encourage the transfer of the reinsurance risk from the US taxpayers, to the private risk market.
“It is only through the broad adoption of risk based pricing and removal of subsidies, in their current form, that the NFIP can be reformed and the private insurance, reinsurance and also insurance-linked securities (ILS) market step in to provide the much-needed risk transfer capacity for U.S. flood risks.”