Bounded Rationality, Climate Risks, and Insurance: Is There a Market for Natural Disasters?

This paper examines the role of insurances to reduce uncertainty associated with climate change losses for individuals. Of special interest is the value individuals place on the reduction of increased flood risks by insurance coverage. Using rank-dependent utility and prospect theories, risk premiums are estimated under different climate change scenarios for the Netherlands. The study delivers two main insights. First, estimation results suggest that a profitable flood insurance market could be feasible. Second, climate change has the potential to increase the profitability of offering flood insurance.