3.1 PUBLIC PRIVATE BALANCE ACCORDING TO JONGEJAN AND BARRIEU (20...

6.3.1  Public  Private  Balance  

According to Jongejan and Barrieu (2008), a major role for government will always be necessary in

mitigation and recovery phases of flood management and therefore their role should be incorporated

into any effective flood insurance system’s design. It is the government’s role to ensure adequate on-

going investment in the first line flood defences. As private insurance companies cannot capture the

benefit of reduced compensation payouts, this role naturally falls to government that benefits both

politically and economically (Paudel, 2012). However, the discourse around the UK flood compensation

system would imply that the government is not fulfilling its responsibility to invest in flood defenses and the costs of this inaction are felt to be passed on to both the insurance sector and, in the case of those households with no or inadequate insurance, private citizens. A primary condition for effective private flood insurance is therefore, an active financial role for government. In the UK, due to the separation of public and private responsibilities, with only private entities are responsible for flood compensation, there is great scope for government moral hazard compared to

France and Belgium where the state has a financial incentive to avoid floods. Over the last twenty years,

the UK insurance industry accused the government of underinvestment in flood protection and relying

too heavily on ex post compensation from the private insurance sector rather than investing in flood

protection infrastructure. In both Belgium and France, a public entity - a government department or

public insurance organisation - that retains responsibility for both flood protection and some proportion of flood compensation reduces temptation for government to avoid or delay flood protection infrastructure investment. A condition for effective private flood insurance is therefore involves clear

boundaries for public and private sector responsibility. Monitoring and enforcement mechanism

should be in place to ensure all main stakeholders, government, industry and policyholders, do what

they are supposed to.

Moreover, in the absence of a suitable state guarantee, as is the case in the UK with the collapsed of

the Statement of Principles, private insurers are wary of committing to fully covering risks that are both

uncertain and where it is difficult to assess the extent of losses in advance (Paudel, 2012). This

inherent challenge to insure flood risk is lower in France and Belgium as clear public-private financial

boundary exists. The state has responsibility and is incentivised to maintain the solvency of the entire

insurance system through involvement in form of multi-level public-private insurance arrangement. This

could be as sovereign guarantor of a level of risk beyond the capacity of the private sector as it the

case in Belgium. Or as a public reinsurer and sovereign guarantor as happen in France. A form of

public-private partnership is desirable for the effectiveness (financial viability) of the flood governance

system as a whole. It lowers the risk of moral hazard on the part of the state. It can also permit private

insurance companies to hedge their levels of risk more cheaply than through private means alone. A

recommended condition for the introduction of an effective private flood insurance system is that the

government acts as sovereign guarantor or public reinsurer for a least a layer of risk in the event

of a catastrophic flood.