Willingness of homeowners to mitigate climate risk through insurance

Climate change is projected to increase flood risks in certain regions due to an increase in both precipitation and sea level rise. In addition, socio-economic scenarios project an increase in urbanization in flood prone areas, which results in a higher damage potential. The combined effect of climate and land use change on flood risks requires innovative adaptation policies to cope with rising risks. Increasingly, attention is paid to the role insurance can play in mitigating damage by providing incentives to policyholders to undertake damage reducing measures. The willingness of homeowners in the Netherlands to undertake measures that mitigate flood damage in exchange for benefits on hypothetical flood insurance policies is examined using surveys. The results indicate that many homeowners are willing to make investments in mitigation. In particular, approximately two-thirds are willing to invest in water barriers in exchange for a premium reduction and about a fifth are willing to replace floor types that are vulnerable to flooding with water resistant floor types. Furthermore, about a quarter are willing to move central heating installations to floors safe against flooding in favor of a reduction in the insurance premium. Estimates of the effectiveness of these mitigation measures to limit potential flood damage in the river delta indicate that prevented damage could be substantial, namely in the order of I billion euro or larger. Reductions in (absolute) flood risk due to mitigation are especially large under climate change. A probit model indicates that existing arrangements for compensating flood damage, risk awareness and perceptions, and geographical characteristics are important determinants in the decision to undertake mitigation. (C) 2009 Elsevier B.V. All rights reserved.