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).
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