2.9 THE FUTURE ACCORDING TO THE DUTCH ASSOCIATION OF INSURERS, IT...

7.2.9  The  Future  

According to the Dutch Association of Insurers, it is the concentration and correlated risk of flooding in

the Netherlands that has been the greatest barrier to offering a workable low cost flood insurance

solution. For the last decade, the Dutch Association of Insurers has been part of a government

taskforce charged with looking at options for making flood risk widely insurable by the private sector. In

2008 an attempt was made to introduce a more concrete form of flood insurance system. This proposal

involved the public sector with the state still keeping responsibility for an upper layer or risk in the role

of sovereign guarantor. The idea was that this would remove previous objections that the government

of the day might be tempted to transfer too much risk to the private sector. As mentioned previously,

this proposal was rejected.

At the Dutch Association of Insurers’ general assembly in December 2012 a third proposal was

approved (the details of this latest proposal are set-out in Box 3 below).

Box 3: Dutch Association of Insurers Flood Insurance Proposal

The following summarises the proposal that the Dutch Association of Insurers put to the Dutch Authority for Consumers and Markets (ACM) for an informal ruling on whether their proposal for basic compulsory flood cover might be in violation of Dutch competition rules. The Dutch Association of Insurers represents over 91% of the value of fire insurances sold in the Netherlands. They proposed a new insurance structure that would have automatically bundled flood insurance with existing household and business fire insurance policies. They claimed that it was responding to a desire from the government for flood insurance to be introduced to reduce the public financial liability that the WTS presents. It was also said that they were fulfilling an unmet demand for flood insurance from within Dutch society. They claim that based on data from Belgium, where a similar system is already in operation, the required participation of insured people must be at least in the range 80-90 per cent penetration in order to create a financially sustainable insurance system. The mandatory inclusion of flood coverage with all fire insurances gets around the problem of too low initial demand associated with the low flood risk awareness in the Netherlands. Blanket cover also removes the destabilising effects that adverse selection can cause under voluntary arrangements.The basic coverage under this insurance structure was as follows:● Coverage for domestic insurance: buildings to €250,000, contents to €25,000, with an excess of €500;● Coverage for business insurance: buildings to €500,000, contents (with inventory) to €1250,000, with an excess of €5,000;● The total coverage would be capped at €5 billion per year. If the total damage in any year exceeded €5 billion the money would be distributed proportionally to victims;● Not covered are: risks in river floodplains, non-material damages (e.g. lost business hours), costs for evacuation, the costs of remediation or any costs related to a dike breach.A new reinsurance company (NHO) would be created to act as re-insurer for the flood coverage. All fire insurers that are members of the Association would be required to link fire insurance with basic flood cover coverage. Non-members would be able to participate and purchase reinsurance from NHO.

                                                                                                               

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In a survey of 1000 Dutch homeowners Botzen (2010) found that most people expected a lower flood return period than

the return period that is used to set dike safety standards.

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The expected costs of the reinsurance for flood would be between 5 and 10 per cent of the existing premium for fire insurance. In addition, the administrative costs from the implementation of individual insurers would be chargeable and individual insurers would be free to decide how the costs are passed on to their policyholders. A form of premium differentiation would be encouraged as firms would be free to offer higher or lower ‘own risk’ clauses on top of the basic cover.The Association argued that compulsory insurance is a necessary condition to make previously uninsurable flood coverage insurable. The un-insurability of flood risk in the Netherlands is, according to the Association, due to the following factors: too low initial demand for flood insurance in the Netherlands due to a lack of public awareness of actual flood risk; the catastrophic nature of the risk, high upfront investment in setting up the system, risk model etc.; high political and moral risk. These factors are elaborated below:● The potential catastrophic impact of a large flood exceeds the financial strength of smaller domestic insurance companies. In the Netherlands, the risk of extreme flood damage is correlated i.e. flood risks are highly cumulative. Furthermore, the consequences for policyholders are difficult to overcome by individual prevention measures alone. This makes insuring the risk, in the opinion of the Association, currently unmanageable. ● The purchase of affordable reinsurance capacity for the smaller individual insurers would be difficult. This is partly to do with the fact that at present no risk model exists. The development of a risk model and the collective purchase of reinsurance capacity would make procurement significantly cheaper for all members of the association. Insurers consider such an investment justifiable if flood insurance is mandatory.● They claim that there is a lack willingness by insurers unilaterally to provide voluntarily flood insurance due to the high political risk of doing so alone. The obligatory nature of the Association's proposal is therefore regarded as a way to guarantee participation of its members.The Association claims that offering a comprehensive and affordable coverage is of direct benefit to policyholders. In the face of they point out is still a substantial flood risk, the compulsory nature of flood insurance will effectively guarantee the continuing solvency of its members.

The majority of the association’s members agreed to propose a new private only compulsory flood

insurance scheme. Backed by a private reinsurance and insurance pool the new arrangement that

would bring in private actors to take over a segment of flood compensation. The 2013 proposal did not

involve the government i.e. it was a purely private. As set out in a letter from the Association to its

members, it proposed an obligatory level of flood protection within all existing home insurance policies.

The intention was that it would have operated alongside current public arrangements and would not

have replaced the WTS. The Association’s proposal was put before the Dutch Authority for Consumers

and Markets (ACM) to seek an informal ruling

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whether it contravened Dutch competition laws. Various

organisations from the Dutch government and civil society were asked to contribute their opinion of the

proposal.

The consultation concluded in mid June 2013. The outcome was that the ACM reached an informal

ruling that found that imposing mandatory catastrophe insurance on all home insurance policies would

be in violation of current competition laws. A spokesman for the Authority for Consumers and Markets

summarised the reasoning behind their decision:

“What we want to look at is if insurance companies have the freedom to come up with other products that differ from this advised product. We want to see if there are companies interested in promoting such as product and to investigate if there is already a market for it. We want to find out what the relationship is

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An informal ruling is not a formal legal decision. It is issued to offer greater clarity to market participants regarding a

particular area of legal doubt.

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between this product and the obligations that the government has in creating safety for flooding and other disasters that could occur. We also want to know what the costs are." (Insurance Insight, 2013)

The ACM concluded there was insufficient public support for compulsory flood insurance. Neerlandse,

the single provider of flood insurance in the Netherlands, were set against the proposal from the

Association and lobbied against it. Following the consultation, van der Kooy Versteg, one of the

founders of Neerlandse was quoted as saying:

“Other insurers have to (and will) follow Neerlandse by offering flood insurance. Not in an obligated way, but on an individual risk based and differentiated voluntary basis. So that every Dutchman can decide whether or not to buy flood coverage.” (Insurance Insight, 2013)

In response to the ACM ruling, the Dutch Association of Insurers issued a press statement on their

website. This statement implied that the ACM ruling had failed to take into account the real flood risk

that the Netherlands faces and not taken into account the benefit that a basic system of affordable

coverage based on ‘principles of solidarity’ would bring to the Netherlands. The association cited the

case of Germany where there were significant floods in 2013. According to the Association, because

Germany has a voluntary private system of flood insurance the risk community is limited to those who

perceive flood risk as high. This adverse selection leads to expensive premiums. Corresponding low

rates of flood insurance penetration rates means that uninsured flood losses have to be covered either

by victims themselves or by the German state. In the opinion of the Dutch Association of Insurers

neither of these attributes offer a financially viable approach compared to a mandatory system.

The association also countered the opinion of the Dutch Authority for Consumers and Markets that the

proposed system was not sufficiently market based, stating in a press release that:

"Insurers retain all possibilities to offer additional coverage, premium differentiation and deductibles. In addition the insurers are free to determine the premium for the basic coverage in a fully competitive market," (Verbond van Verzakeraars, 2013)

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Regarding the slow update uptake of their flood insurance product, van der Kooy Versteeg is reported

to blame the low risk awareness of flooding in the Netherlands. He claims that since the great flood of