3.7 PRINCIPLES OF SOCIAL JUSTICE FROM A SOCIAL WELFARE PERSPECT...

6.3.7  Principles  of  Social  Justice  

From a social welfare perspective, it can be argued that the French and Belgian systems that maintain a

public component are far better at optimising a broad society-wide recovery after a flood compared to

the more laissez faire UK system. A system that incorporates a financial role for the state is less

constrained by short-term commercial considerations and liquidity constraints that can shackle private

insurance companies when faced with major natural disasters. Government operates in a democratic

and political domain it therefore has a fundamental self-interest in recovering the situation as fast and as

comprehensively as possible compared to private insurance companies, that, by their nature, will be

concerned with honouring their insurance contracts with payments as low as they can legally justify.

Botzen and van den Bergh (2008) in their criticism of public flood insurance do not draw attention

equally to cases where private insurance arrangements have resulted in protracted and costly disputes

(EP, 2013). Disputes over flood compensation take place all the time in the UK. As has been

demonstrated recently in negotiations regarding the successor to the Statement of Principles, the UK

government often is politically compelled to intervene to ensure social welfare is taken into account of. A

condition for the functioning of effective private flood insurance, even within a free market framework, is

some kind of strong independent industry regulator or ombudsman to minimise market distortions

and to ensure social welfare is also taken into account.

The major drawback of the UK system is the absence of principles of social justice with correspondingly

low penetration of flood insurance among low-income households. Even in the supposedly free market

UK system, the government of the day would have to make a political judgement whether to step-in. If a

large enough number of people are affected by a flood - as has happened in Germany twice in the last

decade and in the US after storms Katrina and Sandy - it is probable that the UK government would

have to offer financial support to those who find themselves underinsured and for those without

insurance who are frequently poor or elderly members of society. An unintended consequence of a

government offering financial compensation to uninsured flood victims is the expectation that the

government will step-in which crowds out the private insurance offer. In the German voluntary system,

despite the impact of large recent flood, the market penetration of flood insurance is still below twenty-

percent. A condition for effective private flood insurance is therefore the removal or reforms any

parallel system of public flood compensation.