6.3.8 Normative Perceptions
Research by reinsurance company Swiss Re (2012) suggests that while flooding is the most common
natural disaster to befall people, in general the perception of flooding is low relative to other common
natural hazards. The perception of risk is a significant factor when individuals choose to invest in
precautionary measure against natural disasters or give their support to policies that aim to reduce the
risk of such perils. Flood risk mitigation incentives and risk transference mechanisms only will be
effective at the system level if a sufficient proportion of the population are appreciative or exposed to
the flood risk. Without fear of flood there is likely to be little interest or demand for flood insurance. If
flood insurance were only purchased by a handful of the population made up of those who had the
greatest fear of flood, whatever actions or investments they were incentivised to achieve would make
very little difference to the total system and a situation of adverse selection would arise.
In all three case study systems there are mandatory mechanisms in place by government to ensure a
possibly misplaced low perception of flood risk does to lead to low demand for flood insurance and
inadequately sized flood community necessary for the system’s mutuality and financial viability. Due to
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risk myopia, no flood insurance system is able to rely on the collective actions of individual
policyholders to form a critical mass of the population with insurance. Otherwise, after a flood, if
policyholders saw that even those without insurance were compensated, they are unlikely to renew
their insurance contract in the next year. There has to be advantages associated with purchasing flood
insurance compared with not buying it. This is achieved in the French and Belgium systems as flood
insurance is subsidised and seen as good value and therefore worth having (particularly because it is
combined with other natural perils). The UK system is more problematic. Flood perception is, however,
high in the UK as evidenced by the media prominence given there to floods and the difficulties of flood
insurance. Still, without flood insurance being required by banks for mortgage lending it is likely
demand for flood insurance would be closer to the global average of about twenty percent.
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