2.0 MANDATORY FLOOD INSURANCE
Key Concept:
A compulsory flood insurance policy can be achieved in two ways: bundled with other mandatory
insurances or through the government legally obliging insurance companies to provide cover. In NL flood
insurance is currently available but is not mandatory. Flood insurance penetration rates are very low
across all sectors.
Q2.1) Should there be compulsory national flood insurance in NL?
Q2.2) Should compulsory flood insurance allow for the customer to opt for more or less flood insurance
coverage or should it be fixed or capped. Is this different between private and public systems?
Q2.3) Should premiums be differentiated? What are the advantages or possible drawbacks?
Key Answers
To get around the problem of risk myopia i.e. those who do not feel the threat of flood risk chose to opt
out of purchasing flood insurance and the opposite problem adverse selection i.e. those who feel threat
of flood are the only one purchasing insurance which has the effecting of driving up insurance premiums
and unbalanced risk profiles by insurers compulsory flood insurance ensures high market penetration
and a large pool of insured properties. On top of this problem of free riding is lower as the risk is spread
across the whole population that benefits from the insurance. Reliance of ex-post government
compensation is also reduced, as all households will have some level of flood insurance.
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