3.4 MITIGATION INCENTIVES IN BOTZEN’S ANALYSIS (2010), PRIVATE IN...

6.3.4  Mitigation  Incentives  

In Botzen’s analysis (2010), private insurance arrangements as found in the UK, when compared to

public ones found in Belgium and France, are better able to limit total national economic losses from

flooding because they create price incentives for both citizens and the state to undertake loss mitigating

measures. Public and mixed public-private insurance systems rarely incorporate as many financial

incentives for flood risk mitigation. Also, voluntary insurance systems compared to mandatory ones will

be less effective at limiting flood risks because of the low penetration rate (Paudel, 2012). The case for

the introduction of private insurance arrangements is also justified as offering superior policy tools for

climate change adaptation. In addition Botzen (2010) claims that social welfare could be improved if the

individual uncertainty associated with flood losses under an ad hoc public system could be reduced

through the contractual promise of private flood insurance policies. A condition for effective private flood

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insurance is the inclusion of price signals and regulated free market conditions in the sale and

purchase of flood insurance policies. Without free competition between insurers sub-optimal scenarios

such as adverse selection and cherry-picking will reduce economic efficiency of the system.

In the three cases, it has been shown that with both private and public arrangements it is possible that

flood compensation systems can be designed to provide sufficient incentives to households and

businesses to invest or change behaviour to reduce overall flood losses. Without political support and

joined-up government other public policy areas, such as land use planning law and the setting of

building codes might not mitigate flood risk and therefore distort insurance incentives. For example, in

recent decades, the UK government implemented policy that promoted the building of new houses in floodplains. DEFRA, the ministry responsible for flood protection at the time, along with the insurance industry warned against the increased flood risk this entailed. Eventually the contradictions in the system became too great to ignore and the insurance industry pulled out of its promises to keep insuring high-risk properties at affordable prices. Evidence from the UK highlights that when public policies are not

joined-up, well integrated incentives for flood mitigation can fail. A recommended condition is that the

insurance system has political support. Without this, it is probable that other policy initiatives might distort or clash with the price signals proved by private insurance systems,