2.4 MITIGATION INCENTIVES ANALYSIS OF NATIONAL FLOOD COMPENSATION...

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).