Evaluation of flood insurance systems for businesses in a changing climate: an integrated model of flood risk and insurance markets

Floods cause substantial disruptions to businesses resulting in both direct physical losses and business interruption damages. These impacts are expected to intensify due to climate change and socioeconomic development. Flood-induced business closures can trigger widespread economic repercussions, and flood insurance is a key instrument for mitigating these impacts. However, in many countries, a large protection gap limits the effectiveness of flood insurance in providing financial protection against flood impacts. Nonetheless, few studies have examined how insurance tailored to businesses can be designed to cope with increasing climate-related risk. This paper develops a partial equilibrium climate risk insurance model to evaluate flood insurance systems for businesses, incorporating both direct damage and business interruption insurance. Flood damages are estimated at the building level across seven economic sectors. Insurance systems are assessed based on premium levels, insurance demand, and incentives for risk-reducing measures. Using projections of flood risk through 2080, the model quantifies how premiums evolve under climate change and how these changes influence insurance demand. Applied to the Netherlands, the model reveals that the current voluntary flood insurance system results in an annual insurance gap exceeding €200 million, which could increase to more than €700 million by 2080. Reforms that reduce premiums and increase uptake can lower this gap by €130 million. The model further demonstrates that premium-based incentives can stimulate business-level flood adaptation, reducing total flood risk by 4.8%. These findings provide actionable guidance for policymakers and insurers on designing financially sustainable flood-insurance systems that enhance resilience under increasing climate risk.