6.2.4 Mitigation Incentives
Analysis of national flood compensation systems in the preceding chapter suggests that generally a
system of flood insurance is more effective at reducing the potential for flood damage through the
inclusion of downstream mitigation incentives to the level of policyholders. In all three systems there are
financial incentives for flood protection and damage limitation present benefits for all stakeholders by
de-risking the system and therefore increasing overall financial viability and hence economic efficiency
of the systems over the long term (Paudel, 2012). For policyholders, mitigation incentives decrease
flood damage, which, in a well functioning system, will lead ultimately to lower premiums - a form of
collective return on investment. For insurers they result in fewer claims and therefore higher profits. The
French and Belgian governments that are both responsible for some level of compensation are
motivated to invest in flood protection measure to avoid this payment. This incentive is not in place in
the case in the UK where the government has no direct responsibility for flood compensation.
All three case study countries did, however, include some form of downstream incentive mechanisms.
The UK system has the most comprehensive range of financial incentives, or example differential
premium pricing or with discounts on deductibles. In theory, UK citizens are encouraged towards flood
avoidance and protection measures, which should make the whole system more economically efficient.
By implication, systems that do not integrate all these mechanisms, for example, the French or Belgian
compensation arrangements could be criticised as being less economically efficient. The UK is the
freest market and involves the widest range of options. The French and Belgian systems, being public
private arrangements, are more solidaristic but both do include differentiation either through deductibles
(France) or premiums (Belgium).
Joint state responsibility for flood compensation (or a level of compensation) and flood protection also is
a form of non-market incentive as government is motivated to invest in mitigation measures to avoid
public payments. Both Belgium and France intertwine state and private responsibilities and incentives.
The UK system is at risk of moral hazard on the part of the government as the responsibilities for flood
compensation are in private hands.
The UK insurance system does not take into account or incentivise community based flood protection
measures. This is an economic weakness. It is very often more efficient for flood defenses to be built
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and paid for collectively at the community level. The French system has incorporated some level of
community incentives for flood prevention. If a community has not adopted a “prevention of risk plan”
the deductibles charged will be higher than if they had one. The NAT/CAT therefore also provides
incentives for voters to lobby local politicians to implement these plans within their communities (Faure
and Bruggeman, 2008).
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