7.4.2 Mutuality
The greatest challenge in designing an economically sustainable national flood insurance system is to
build a sufficiently broad risk community. A large enough risk community is necessary to meet the
interrelated conditions of mutuality and financial viability. There are several options for insurers to
build an appropriate sized risk community comprising the necessary cross-section of policyholders to
meet these two conditions.
A first option is for the insurance sector to offer comprehensive natural disaster insurance packages that
ties flood risk to other natural perils. This is the case in the Belgian WN and the French NAT/CAT where
flood insurance is offered with other natural hazards such as earthquake and hail. As the main natural
peril the Dutch face is flood, it could be politically difficult to combine a high risk flood population with
less exposed groups to build a sufficiently broad risk community. The example of the Belgian WN might
be followed. In order to make the catastrophe insurance more relevant to city dwellers, and, therefore
more widely legitimate, the compulsory WN was in 2005 expanded to cover losses related to sewer
overflows as well. What the equivalent expansion would be in the Netherlands is open for discussion.
A second option is to bundle flood insurance with other simpler risks such as fire insurance in order to
expand the risk community sufficiently that the overall insurance package becomes acceptable and
affordable for a large enough population (Swiss Re, 2012). This was the intention under the proposal
from the Association of Dutch insurers to add 5% to 10% to existing fire insurance policies to cover
certain forms of flood damage. As discussed in the Dutch case study, the Dutch Authority rejected this
proposal for Consumers and Markets as technically violating competition rules. In their informal ruling
they also cited the lack of choice for Dutch citizens who were not exposed to flood risk. This highlights
the potential political resistance to the imposition of compulsory insurances, particularly when introduced
by the private sector rather than by a not-for-profit public body.
The task is harder for natural catastrophe insurances. Studies have found that people are very reluctant
to purchase insurances for very low probability high damage natural events (Swiss Re, 2012). This is not
only about a lack of information and cognitive limitations in calculating real rather than perceived risk
probabilities. Faure and Bruggeman (2008) refer to research that suggests that the decision process
when buying insurance involves certain “heuristics and biases” that put people off paying a premium for
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a low probability event when there is a high possibility they will never receive any return on what is
considered to be a form of long term investment rather than straightforward insurance.
A third option is through changes that make flood insurance mandatory either through legislation or as a
quasi- obligation. For example, in the UK, it is not possible to secure a mortgage without sufficient
building insurance that includes flood protection as standard alongside other risks such as fire. The UK
flood insurance market is quite mature and to date has not relied on significant legislation but instead on
voluntary agreements between the insurance industry and the government.
When insurance is mandatory or quasi-mandatory, the risk is shared on a more collective basis than
when insurance is not mandatory. In countries that operate without a form of mandatory insurance, after
a flood, the victims who chose not to purchase insurance have to rely on their own savings if the state is
not prepared to offer them financial relief. In order to achieve sufficiently high penetration rates and to
build a risk community large enough for premiums to be affordable, the proposal from the Dutch
Association of Insurers to replace the current system emphasised the necessity of making flood
insurance mandatory.
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