3.1 OPTIONS FOR THE INTRODUCTION OF PRIVATE FLOOD INSURANCE...

7.3.1  Options  for  the  Introduction  of  Private  Flood  Insurance  

Figure  2:    Public-­‐Private  and  Voluntary-­‐Mandatory  Scenario  Matrix

On the X-axis is the extent of private sector involvement in flood compensation. On the Y-axis is

whether flood compensation arrangements are voluntary or mandatory. As can be seen in the above

matrix there are six core scenarios (S1 - S6) for introducing private flood insurance to the Netherlands.

These are described next:

S1: A public flood compensation system that covers all citizens automatically. Private flood insurance

products are free to enter the market and compete for policyholders under this scenario. However,

unless the private system could offer insurances with significant benefits over the public system, the

public arrangement would probably crowd out the private offer in a free market. This is very close to the

current situation with the WTS in the Netherlands.

S2: A private flood insurance system that is voluntary to join with no alternative public compensation

arrangement. This scenario is the free market option that would offer a level playing field for private

insurance companies to compete for flood insurance policyholders. This is the case in the UK.

S3: A mandatory public compensation system. Private insurers would probably not want to enter a

market with a comprehensive public compensation system. Unless the mandatory state backed

compensation scheme was inadequate, it is not likely that households would choose to purchase

private flood insurance cover as well. This is the case in Spain.

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S4: A mandatory private flood insurance system. This would be the optimal scenario for the introduction

of private insurance as households and businesses would be legally forced to purchase flood insurance

from a private insurance company. This is the scenario proposed by the Dutch Association of Insurers

but it was rejected by the Dutch Competition Authority on anti competitive grounds.

S5: A mixed public private national flood compensation system that is voluntary to join. This is the case

in the USA with the National Flood Defence Program. Their flood insurance policies are administered

and sold by private insurers for a fee but the actual actuarial risk is borne by the US Federal Reserve.

S6: A mixed public private national flood insurance system that is mandatory or quasi-mandatory. This

arrangement is in operation in Belgium and France where flood insurance is bundled with first party

property insurances that are sold by private insurers. Up to a predetermined level, the risk remains with

the private insurers. If losses exceed that level then the state will become liable either via public

reinsurance or a sovereign guarantee.

Without a significant number of changes to the current flood compensation system in the Netherlands,

S1 is the scenario that most closely reflects current reality and is therefore taken as the baseline

scenario against which the following conditions will be compared.