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492 J.Linnerooth-Bayeret al.
21.3.2 Costsof Insurance
While there are substantial benefitsprovidedbyprivatelyorpubliclyoffered insur-
ance, thecostsof insuranceareconsiderable.Theaveragefinancialcostof insurance
generallysurpassesaverage losses,meaning thatun-subsidised insurancepremiums
aregreater thanwhat theclient expects to lose.For this reason, clients shouldcare-
fullyconsider thecostsandbenefits,andrelyoninsuranceonlyafterconsideringthe
alternatives, or in thewords ofVaughan andVaughan (2008, p. 62), only as a last
resort. Indeed, without outside subsidies and other forms of support policyholders
can expect, on average, a higher financial burden in the long runwith insurance
thanwithout it. That insurance results, onaverage, ingreater costs to those insured
isoftennot appreciatedandneeds further explanation.
The insurance premium tends to be inflated above the ‘actuarially fair value’ or
‘purepremium’ (expected losses) due to the fact that on topof theannual expected
losses a riskpremiumis charged.As shown inFig. 21.2, the riskpremiumisdeter-
minedbytwofactors:expenseloadandriskload(Pollner2000).Additionally, in the
caseofprivateinsuranceaprofitmarginischarged.Ingeneraltermstheexpenseload
reflects thecostsof the insurerdoingbusiness,and therisk load includes thecostof
holdingcapital, reinsuranceandofassuminguncertaincontractsforhigh-levelrisks.
Therisk loaddistinguishescatastropheinsurancefromother typesof insurance, like
life and health, since insurers covering catastrophic risksmust be prepared to pay
claimsfordisastersthataffectwholeregionsorcountriesatthesametime(co-variate
risk).Still, if insurersare sufficientlydiversified, the risk loadwill notonly insulate
themfromlarge losses atone time,butwill also in the long run result in significant
profits.
Fig.21.2 Costs contributing to catastrophe insurance premium SourceAdapted fromCummins
andMahul (2009)
Loss and Damage from Climate Change
Concepts, Methods and Policy Options
- Title
- Loss and Damage from Climate Change
- Subtitle
- Concepts, Methods and Policy Options
- Authors
- Reinhard Mechler
- Laurens M. Bouwer
- Thomas Schinko
- Swenja Surminski
- JoAnne Linnerooth-Bayer
- Publisher
- Springer Open
- Date
- 2019
- Language
- English
- License
- CC BY 4.0
- ISBN
- 978-3-319-72026-5
- Size
- 16.0 x 24.0 cm
- Pages
- 580
- Keywords
- Environment, Climate change, Environmental law, Environmental policy, Risk management
- Categories
- International
- Naturwissenschaften Umwelt und Klima