Who bears the indirect costs of flood risk? An economy-wide assessment of different insurance systems in Europe under climate change

Abstract

Anticipated increase in future river flood risk highlights the need for effective flood insurance, as it enables hedging against this risk. However, its design varies significantly across countries. This study contributes to the debate on designing flood insurance mechanisms from an economy-wide perspective, considering both socioeconomic and climate changes. We apply a multi-regional computable general equilibrium (CGE) model for 2050 and find that, under current insurance market systems, flood risk causes regional GDP losses of up to −0.5%, societal welfare losses of up to −1%, and private and public consumption losses of up to −0.5% and −2.4%, respectively. These estimates are all relative to a scenario without flood risk. Our results indicate that flood risk intensifies pressure on public budgets. We find that insurance market reforms, including a higher degree of risk-sharing, mandatory purchase requirements, and public reinsurance, can alleviate adverse welfare effects and the burden on public budgets.