3.1 THE ECONOMIC EFFICIENCY ARGUMENT THE ABOVE CONCLUSION CONFL...

8.3.1  The  Economic  Efficiency  Argument  

The above conclusion conflicts with the result of the comparative study of national flood compensation

systems undertaken by Botzen and van den Bergh (2008). In their study, Botzen and van den Bergh

(2008) propose that the Netherlands should incorporate a multi-layered insurance public-private flood

insurance system. For them, such a system can best provide adequate incentives to limit flood losses

and overcome capital shortages in insuring large flood losses. It is argued that private flood insurance

increases economic efficiency due to the presence of premium pricing, leading to what Botzen (2010)

calls ‘optimal loss-reducing incentives’. For Botzen and van den Bergh (2008), the main weakness in

the French and Belgian systems is the absence of premium differentiation that reduces overall

economic efficiency by failing to incentivise flood mitigation investments or deter housing development

in high-risk flood zones.

The economic efficiency argument implies that more private flood insurance in the Netherlands could

be one strategy to cope with increasing climate change risks. Individual actions are however far less

economically effective than when flood mitigation measures are taken at the collective level. Currently,

it is primarily the Dutch government - national and local - that is responsible for public flood avoidance

and protection infrastructure. Other than voluntary investments, building codes and planning rules are

the main tools that government has available to encourage or force private households or businesses

to take flood risk into account in private properties, both current and new. Nevertheless, it has been

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known for centuries in the Netherlands that taking collective measures for flood avoidance makes more

economic and social sense than individual ad hoc arrangements for flood mitigation or insurance.

In other countries where floods are more frequent events, annual flood losses will fluctuate between

good and bad years. In the UK or France, on average, there are about £400 million insured losses per

year (EP, 2013). As the public system of flood prevention in the Netherlands has been so effective

since the last great floods in the 1950s, there have been only a handful of floods since that time. The

last medium scale flood was in 2003. Against this background, it might be considered unnecessary and

economically and socially superfluous (and therefore inefficient) to introduce an entire multi-million euro

insurance system and bring into play risk transference and mitigation incentives down to the level of

private householders. A fully operational ex-post public or public-private compensation system would

also be unnecessary given the small volume of claims that would have to be handled each year in the

Netherlands (EP, 2013).