Business-level flood insurance coverage and adaptation under climate change in the Netherlands

Floods cause large disruptions to society by causing both direct and indirect damages. These impacts will be further exacerbated by climate change and socioeconomic development. In addition to direct impacts, businesses may face indirect losses resulting from disruptions to their operations, adding extra complexity to business risk assessments. Additionally, business closures can have far-stretching economic repercussions. Flood insurance is an instrument to reduce the impact of floods for businesses by spreading the risk over space and time. While the (future-) increase in flood damages puts pressure on businesses, insurance systems tailored to businesses remain underexplored.

This research applies and extends the ‘Dynamic Integrated Flood Insurance’ (DIFI) model to analyse flood insurance for businesses in the Netherlands, taking into account both insurance against direct damages and insurance against business interruption damages. We analyse the responses of various insurance systems to changes in flood risk. These systems include voluntary insurance, solidarity-based insurance, and public-private partnership insurance. In addition, we assess the effect of adaptation on the viability of flood insurance by allowing businesses to take building-level measures to reduce their flood risk.

To facilitate the insurance analysis, flood damages are estimated using an object-based approach that takes high resolution (25m x 25m) inundation maps as input. To simulate the insurance uptake, company-level financial data obtained from the Dutch Chamber of Commerce is used in a subjective expected utility framework. This module is calibrated on actual insurance uptake numbers and takes risk misperception into account. DIFI simulations until 2080 show how premiums, insurance uptake, and policyholder adaptation efforts develop over time for various insurance market structures. These projections provide valuable insights into the viability and effectiveness of different insurance market structures in the face of climate change and shifting socioeconomic conditions.

The novelty of this research lies not only in incorporating businesses into the insurance analysis, but also in introducing a focus on business interruption damages, offering a more comprehensive perspective on flood impacts for businesses. Initial results reveal that, in certain sectors, flood-related business interruption damages are nearly as high as, or even exceed, direct damages. These findings offer new insights into the impact of flooding on businesses and the challenges of insuring such damages.

Consequently, the findings are relevant for policymakers and insurers by identifying which insurance market structures are more resilient to the increasing flood risk, providing guidance on designing financially sustainable insurance framework. Moreover, the study highlights the need for targeted insurance incentives to encourage business-level adaptation, and it informs decisions regarding potential government involvement in the insurance system to ensure equitable access to flood insurance.