Modeling Solutions for the Home Insurance Availability and Affordability Crisis in Flood-Prone Areas of Australia

Full title: 'Modeling Solutions for the Home Insurance Availability and Affordability Crisis in Flood-Prone Areas of Australia: An Analysis Using CGE Technique'
 
The impact on home insurance pricing caused by extreme-weather events in Australia has increased dramatically over the past few decades. Despite the use of such insurance over a long period of time, quantitative macroeconomic assessments of insurance programs are lacking. The TERM (The-Enormous-Regional Model) is employed which is a multiregional model of Australia, treating each region as a separate economy. We develop an original computable-general-equilibrium framework based on TERM distinguishing 216 sectors and 334 regions. This is aggregated to sectors of interest, including different forms of insurance, and concentrates on regions most vulnerable to climate-change induced damage. The idea is that in these relatively local areas, insurance premium increases rise after an adverse event. Then, apply actuarial theory to impose increased premiums on agents seeking insurance following an adverse event.
The overarching objective of the study is to factor climate change in calculating natural peril (wildfire, flood & storm) coverage, and impacts such as insurance availability, affordability and insurability as homeowners will end up with higher premiums.
In order to realistically model the market and welfare impacts of natural perils on home insurance products, we specify the home insurance uncertainty, leading us to model two periods (before and after the climate shock). Second, we introduce a household in high-risk prone area, giving us the possibility to capture their risk attitudes. Third, we model the market of home insurance products, with explicit ex ante premiums paid by the household and ex post in cases of significant catastrophic losses. The three successive modifications capture the risk sharing properties of insurance programs and allows to make use of catastrophe modeling in ratemaking to make homeowners’ insurance more affordable and more widely available to homeowners.
 
Find the Q&A here: Q&A on 'General Insurance and Society'