3.7 AN ACTIVE FINANCIAL ROLE FOR GOVERNMENT IF THE DUTCH SYST...

7.3.7  An  Active  Financial  Role  for  Government  

If the Dutch system for flood compensation were to change to include a greater role for private

insurance in flood compensation, the state should retain responsibility for an upper tier of risk so it still

has ‘skin in the game’. Keeping the government partly liable for flood losses is that moral hazard on the

part of the government can be limited. This has been an ongoing problem in the UK.

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The Dutch Governments could also help create the conditions for a viable private flood insurance

industry. Botzen (2010) calls for an active role of the government to overcome market failures that

typically challenge private insurance of natural disasters which include capital shortages, risk

prevention incentives, enforcing strict building and planning regulations and setting up condition to

achieve sufficient market penetration to keep premiums affordable. For example, the Dutch could follow

the UK model and French NAT/CAT by encouraging companies to build up capital reserves through tax

exemptions - so called equalisation reserves. This helps stabilise potential yearly fluctuations in losses

and mitigates against insurance companies going bankrupt. Policies that lead to a financially robust

private flood insurance sector could mean that it is less likely that public funds would be used after a

major flood. How far private insurance displaces public compensation is disputed. After all the recent

natural catastrophes huge amounts of public money have been channelled to the victims by

governments (Jongejan and Barrieu, 2008; EP, 2013). The extent to which private insurance is of

benefit after a major catastrophe is an exciting avenue for further research. An on-going and active role

for the state in a role that does not crowd but supports private sector initiatives is a strong condition for

the viability of future of private flood insurance in the Netherlands.