Natural perils insurance and compensation arrangements in six countries

This study has made an assessment of the allocation of responsibility for the climate change adaptation of buildings and infrastructure among key agencies in Norway, Sweden, Finland, Germany, France and Canada. The report presents the various natural perils insurance and compensation schemes prevailing in these countries with the aim of revealing the extent to which emphasis is placed on incentives to implement preventive measures in preference to building restoration. The report is based on a combination of document studies and in-depth interviews with representatives either from the public authorities or from insurance or financial institutions in the countries in question.\nLocal municipalities have overall responsibility for the implementation and supervision of climate change adaptation strategies in all the countries examined in this study. Executive authority and the nature of the subordinate state agencies vary from country to country, but the frameworks for the allocation of responsibility exhibit a number of similarities. The allocation of responsibility is to a large extent well-defined and often under statutory regulation. Germany and Canada are particularly distinctive among the countries examined in this study, primarily because the allocation of responsibility for adaptation strategies reflects the fact that they are federal states.\nCompared with the work to reduce greenhouse gas emissions, climate change adaptation represents a relatively new area of focus. The EU has evolved into a driving force for climate change adaptation activities in Europe, and in 2013 launched its own adaptation strategy. The strategy focuses on consolidating the foundation for decision-making related to adaptation measures, and on supporting the coordination and funding of actions taken at national level. It delegates responsibility for national strategy development to each member state, and subsidises initiatives for the development of national expertise, which in turn form the basis for the identification of appropriate measures.\nIn general terms, compensation for the impact of natural perils on property consists of three components;\n• Insurance\n• Self-assurance (by which the property owner must be prepared to cover the costs of\nany losses himself)\n• State-funded compensation provided by governments, a ministry or a regional public authority\nThe ways in which these various schemes are triggered depend on both the causes of damage and the nature of the property that incurs damage. The extent to which any given scheme places emphasis either on the cause or the nature of the property varies from country to country. The distinctions between the schemes may be unclear, for instance, in terms of the role of the state as both a formal and informal underwriter for the insurance companies. In Finland, there has to date been no need to establish a state-funded safety net in the form of regional, national or EU funding.\nIn Norway and France, natural perils insurance and compensation schemes are in part incorporated into the public sector. Insurance premiums are not risk-based, entailing a certain element of public solidarity associated with the schemes. In France, the state-funded compensation scheme is structured as a fund, twelve percent of which is provided by the insurance premiums. This percentage has increased over time, and also finances climate change adaptation measures such as monitoring, mapping, municipal planning, research and the dissemination of information, as well as expropriation and evacuation measures. In Norway, a 0.065 part of fire insurance premiums is allocated to provide compensation for losses caused by natural phenomena, and is used primarily to cover the restoration of damaged buildings to their original standard.\nIn Sweden, Finland, Germany and Canada, natural perils insurance and compensation is provided mainly via private sector insurance schemes. In Sweden, Finland and Canada, building insurance is nevertheless referred to as semi-voluntary, because the banks will only grant loans for property to those who have also taken out property insurance. If a property owner has no need to take out a loan, he is not obliged to insure the property. The extent of coverage in these countries is thus approximately just as high as that in Norway and France.\nA private sector scheme is able to provide incentives to implement preventive measures by means of excess payments and risk-based premiums. At the same time, the existence of a parallel, state-funded, safety net may act to weaken any incentive to take action to prevent damage caused by natural phenomena. Another factor that may weaken incentives to implement preventive measures is that it is currently common practice among insurance companies to cover property restoration costs above and beyond their original standard following damage caused by natural phenomena. Some insurance companies offer guidelines on climate change adaptation in their policies, and the party taking out the insurance may incur a payout reduction if the guidelines are not adhered to. Even if certain incentives exist either within or outside the schemes, these are considered to be too passive in relation to the expected impacts of climate change.\nIt is the prerogative of individual insurance companies to offer supplementary cover. However, as a rule, private sector infrastructure is not insured. In Norway, a state-funded scheme provides compensation for losses resulting from natural phenomena to private sector infrastructure such as roads, quaysides and harbour walls. Large private sector companies can take out exclusive insurance policies to cover their infrastructure. This has been the case for a number of bridges in Sweden, the express train infrastructure connecting Stockholm Arlanda airport, and rail infrastructure in Norway. State institutions act as self-insurers in all the countries examined in this study.\nThe natural perils insurance and compensation schemes that operate in the various countries are different, and all of them have recently been amended or are in the process of revision. However, it is not possible to identify an overall trend in this process. Finland moved away from a private-public scheme to an entirely private sector arrangement in 2014. However, Canada is currently in the progress of developing public sector schemes in response to the refusal by the private sector to offer adequate flood insurance. The Norwegian system has been the subject of review but, to date, no decisions have been taken regarding modification.The solidarity principle infuses both the Norwegian and French systems with high levels of credibility.\nOther areas in which the incentive to adopt adaptation measures can complement incentives set out in current insurance and compensation schemes include statutory building regulations and climate change adaptation loans. By requiring higher levels of climate change adaptation, statutory building regulations may contribute towards boosting incentives for property owners to implement preventive measures. Many countries are in the process of revising their statutory building codes to incorporate requirements for adaptation measures. However, our findings indicate that to date, the specificity of these requirements is very limited. The market for green bonds is expanding rapidly and, in the future, climate change adaptation loans may act to provide incentives in the same way as green loans do to promote energy-efficient buildings. For example, in the right context, the level of an insurance premium could be fixed based on the implementation of measures that also triggers a climate change adaptation loan and certification of the adapted buildings. However, such a scenario will also require developments in the field of adaptation performance indicators.\nA natural extension of this study will be the development of alternative structures for natural perils insurance and compensation schemes that not only retain the solidarity principle, but which also offer further incentives to building owners to implement preventive measures.

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