2.2.6 Mitigation Incentives
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A deductible (or excess in the UK) is the portion of damage that the policyholder has to pay before the insurer covers the
losses as set out in the insurance contract. It is referred to as an indemnity (Paudel, 2012)
7
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A key component for the long run sustainability of an insurance system is the effectiveness of incentives
and policies that are able to motivate stakeholders to either prevent or reduce potential flood damage
(Paudel, 2012). It is not necessarily only a task for government bodies to implement flood risk reduction.
In an economically efficient system, all stakeholders, including all levels of government, insurance
companies, the building industry and policyholders will be incentivised to participate or fund flood risk
reduction or adaptation measures. A classic approach is for insurance companies to offer lower
deductibles/excesses and more attractive premiums to reward policyholders who voluntarily take
measures to limit their own risk exposure.
