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.
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