8 PUBLIC AND PRIVATE RESPONSIBILITY THE INVOLVEMENT OF THE ST...

2.2.8  Public  and  Private  Responsibility  

The involvement of the state and, by inference the extent of private sector involvement is an important

point of difference between different national flood insurance systems. It directly and indirectly influences

most of the other components identified and it therefore a key attribute in this study. The next

paragraphs describe the variation in this attribute and its relationship with the other components of flood

insurance systems.

Often national flood compensation systems operate as types of public-private (PP) partnership. The aim

of such arrangements is to share risk and to make optimal use of each sector’s respective expertise.

Insurance companies are motivated by profit maximisation. As such, they should be skilled at selling,

underwriting and administering insurance policies. Government has the advantage that it has more

flexible access to capital than commercial insurers and also possesses a greater capacity to spread risk

temporally as well as geographically. Within a multi-level flood compensation system, as advocated by

Botzen & Van Den Bergh (2008), the government’s role could be as public reinsurer or as state

guarantor for losses incurred above the commercial limits of the private sector.

Flood compensation systems can be categorised as public, private or a combination of public and

private (PP). In PP systems there can be found many different combinations involving the operation of

administrative tasks and/or financial aspects of flood compensation. The division of public private

responsibility can be achieved through a multitude of approaches including, though not limited to: the

legal devolution of powers from government to the private sector, the tendering of contracts to the

private sector, or through public-private partnerships based on free market or regulated principles. The

role of the state in flood compensation arrangements also varies by country but could include, inter alia,

the state taking on flood risk directly, the provision of a state sovereign guarantee in a multilevel

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insurance system, or the state creating favourable conditions for flood insurance, for example setting-up

tax regimes that encourage the accumulation of capital by insurance companies. Paudel (2012) notes

that most current natural catastrophe insurance systems, including those for floods, were developed to

include a level of collaboration between government and the private sector. Even in a purely private

system, such as that in the UK, there is still a role for government as industry regulator.