Market-based mechanisms for climate change adaptation: Assessing the potential for and limits to insurance and market based mechanisms for encouraging climate change adaptation

John McAneney, Ryan Crompton, Delphine McAneney, Rade Musulin, George Walker and Roger Pielke Jr.

This study on the potential of insurance companies to encourage risk reduction and resilience building found that the key mechanism by which insurance products can provide incentives to reduce vulnerability is by charging premiums based on the extant risk. As part of this study, schemes that might profitably be employed to incentivise behavioural change were examined, including Residual Market Mechanisms (RMMs) and Catastrophe (CAT) Bonds (new financial instruments that transfer risk to the capital markets). The examples, drawn mainly from the US, Spain, France and New Zealand did not provide any clear models for Australia, but have highlighted a number of possible "perverse" outcomes, leading to an urge for careful reflection by Australian policy makers before implementing any such schemes. In the US for example, the political influence exerted on the pricing of RMMs in an attempt to keep prices affordable and encourage take-up rates has resulted in policyholders in risk-prone areas being subsidised by homeowners in low risk areas, thus encouraging development in high-risk areas. While CAT Bonds or traditional insurance transfer the costs disaster risk, they do not do away with the risk itself; ultimately, insurance-based incentives cannot be an alternative to prudent and risk informed land-use development.

Resource Type: 
Case studies
Research report
Australia Wide
Finance, business
Legal issues
Storms, cyclones

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