Climate change is real and it is everywhere. Whereas island nations in the Pacific are threatened with rising sea levels, Europe suffers from ever more frequent scorching summers and resulting drought. Take the case of Belgium, where heat waves in 2018 or 2020 have exacerbated an already fragile drought risk profile. An all too tangible effect is that houses built in areas where ground water reservoirs are dwindling start to rupture. What adds insult to injury is that insurers appear unwilling to pay for damages: these climate-related risks simply did not feature in insurance policies made up decades ago. The public and the media have called upon the secretary of state responsible for consumer protection to come up with a solution.
The Belgian insurance sector and government are currently investigating how to address the ecological and financial issue. Should the risk premium be raised on all insurance policies in an effort to spread risk, or should only policy holders in designated risk areas be subject to a raise in premia? Should urban planning initiatives and real estate projects be required to assess these new types of risk beforehand?
We explored the matter ourselves and came up with this: a dynamic map that pictures the drought risk - as measured by a climate indicator called the standardised recipitation-evapotranspiration index http://sac.csic.es/spei/map/maps.html - in a spatial distribution. Other relevant indicators might consider the soil composition for example: clay and lime soils tend to be more vulnerable to drought. We combined this ecological dimension with the socio-economic dimension to suggest that insurance premia design might be targeted to, say, income levels as well - or alternatively to real estate prices.
Next to these historical analyses we are investigating whether climate data from integrated climate models might be harnessed to predict medium- to longer-term risk profiles on a spatially distributed basis. Urban planners, real estate promoters, individual households and governments will need to rely on such predictions to better adapt to climate change.