6.3.2 Mandatory Voluntary Status
Faure and Bruggeman (2008) observe a European trend towards the implementation of mandatory
catastrophe insurance. They explain this tendency as a reaction by governments to the need to shed
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financial liabilities in times of shrinking public budgets. The first country to introduce this kind of system
was France with the NAT/CAT where a catastrophe provision is automatically supplied on all property
insurances. This system has been criticised from an economic perspective as not optimising social
utility when particular groups not exposed to risks such as flooding are forced to purchase this kind of
indemnity regardless. Insurance companies under the NAT/CAT are not permitted to set risk-based
premiums but do have limited options to set different levels of deductibles. These are of limited value as
flood mitigation incentives as they are only applied after flood damage has already occurred. Variable
flood insurance premiums are more effective as they are applied (and felt by the policyholder) each
time the insurance contract is renewed.
It is technically possible that compulsory insurance is combined with risk reflective premiums. This is
the case in Belgium where policyholders facing different types and levels of risk are charged differing
premiums. Although a mandatory system, it has been designed so that Belgium insurance companies
are able to adjust risk premiums for each policyholder’s own circumstances. This offers both more
opportunity for incentivising flood mitigation but also greater revenue generating potential for insurance
companies. It would be seen by economists as leading to higher levels of overall utility than in a system
that operates with flat rate premiums.
A recommended condition is that the insurance community is as large as possible. Globally,
evidence suggests that a high market penetration for flood insurance is only found in systems, be they
public, private or mixed, which have a mandatory element. Without a large enough insurance
community the basic principles of insurance concerning financial viability and mutuality will not be met
and the insurance system will likely become insolvent.
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