6.3.5 Financial Attributes
Little was found in the literature about the relative costs to the nation of running the different systems in
the above case studies. In a private or public private system financial incentives can flow downstream to
policyholders that should promote efforts to reduce individual risk. For example, avoiding high flood
insurance premiums by building or buying a house in a lower risk area. Operating a system of premium
differentiation or offering tailored discount to individual policyholders to reflect their individual risk is more
costly than a flat fee system but should result in lower claims and hence lower running costs over the
longer term (Paudel, 2012).
Premiums in the UK are however quite expensive compared to other countries studied in part due to a
lack of public reinsurance (Paudel, 2012). The French NAT/CAT solves this issue of affordability as
premiums are set at fixed percentage and risk-based differentiation is not permitted. The presence of
public reinsurance also keeps the system affordable compared to the UK. This solidaristic component
reduces the major financial viability challenge for commercial insurance companies covering natural
hazards that cause highly correlated losses.
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