3.6 LESSONS FROM THE DUTCH ASSOCIATION OF INSURER’S PROPOSAL...

8.3.6  Lessons  from  the  Dutch  Association  of  Insurer’s  Proposal  

The 2013 proposal from the Dutch Association of Insurers involved setting up a private reinsurance

company to spread the Dutch flood risk beyond member companies and across national borders. Four

billion euros of risk capital was agreed in principle from a Lloyd's syndicate. A further billion was

earmarked from the members’ own reserves. This kind of private reinsurance is usually quite expensive

to arrange (Paudel, 2012). Hence, the Dutch Association of Insurers proposal did not appear to be a

very economically efficient way of bringing private flood insurance to the Netherlands. It was, however,

according to the Association, one of the only ways that a comprehensive, affordable basic flood cover

could be achieved within the private sector without a significant financial role for the Dutch state. What

should be avoided is a mixed arrangement like the NAT/CAT where both public and private reinsurance

are available. The problem here is one of cherry-picking leading to the highest risk policies being

stacked in the public domain while the most profitable customers are cherry-picked by the private

sector.

Under the Association’s 2012 purely private arrangement proposal, it could be expected that a not

insignificant part of the premiums raised would go to paying the Lloyd's syndicate for the reinsurance

cover. Given the high fees Lloyd's would charge for this kind of reinsurance, the inclusion of mandatory

flood insurance would be a necessary condition if the insurance was to be generally affordable. In a

voluntary system, the reinsurance fees would not be spread over large enough risk community to make

them affordable. The choice of private reinsurance does raise the question: why did the Association’s

proposal require reinsurance rather than being funded directly from the industry’s own capital reserves.

Is flood risk still considered to be too high for the Association’s members to risk more of their own

money?

The Dutch Association of Insurers proposal did not call for a change to Dutch law, instead it relied on

the fact that approximately 95% of home insurance in the Netherlands is handled by the Association’s

members. This is in effect a form of cartel operation (EP, 2013) that has high market influencing

capabilities, should they be permitted by Dutch regulatory authorities. Under the Association’s proposal,

the WTS catastrophe compensation law would have continued. Dutch citizens might question why this

should be the case as, in essence, they would be paying for a form of flood compensation through

general taxation and again through first-party insurance. If the flood insurance proposal from the

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Association were not mandatory it is likely that demand for coverage would be low as Dutch citizens

might expect to be compensated by the WTS - despite its supposed weaknesses frequently alluded to

by Botzen et al. In the event of the large flood, it would probably be politically irresistible to compensate

flood victims in excess of the limits written in the WTS. With this public compensation system in place

and without any mandatory underpinning, it is unlikely that private flood insurance would have mass-

market appeal.