3.8 NORMATIVE PERCEPTIONS RESEARCH BY REINSURANCE COMPANY SWISS R...

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.