Market Adaptation to Climate Risk: Evaluating Property Insurance Pricing in Vulnerable Coastal Communities

Abstract

Financial recovery through insurance is critical to restoring socio-economic livelihoods as severe weather and water damage rank as the leading causes for property insurance claims across Canada. As climate change increases the frequency, intensity and duration of extreme weather, the availability and affordability of property insurance markets could deteriorate as the insurance sector absorbs economic losses generated by damage. To sustain insurance coverage, property owners and insurance must adapt to manage climate risks and adjust to physical hazards, specifically coastal, inland and urban flooding, which is the largest cause of property damage in Canada. This study is designed to test the pricing of risk in the property insurance market and reveal how insurance companies insure property in vulnerable coastal communities. To test for this, six market indicators will be used to evaluate the insurability of markets in coastal communities in Nova Scotia and Prince Edward Island (PEI). Residential property insurance quotes were obtained from active insurers to determine the extent of risk sharing and risk based pricing using the indicators. The findings are evaluated using statistical analysis and looks for signs that could lead to a market failure manifested as shortages in availability and affordability. The nature of insurance provides an opportunity to explore alternative approaches to protecting property in vulnerable communities through a variety of recommendations. By evaluating property insurance markets to physical hazards associated with climate change, this paper addresses a significant gap in insurance and climate change adaptation research. While insurance economics scholars have identified the source of market failures, they have yet to assess how markets should adapt to climate risk in vulnerable coastal communities. With a unique focus on the understudied economic proxy of insurance market vulnerability, this research contributes to the growing field of climate change adaptation.