2004, from Botzen & Van Den Bergh, 2008).
72
Another option to increase the randomness principle is to deal with outliers in risk communities by
bringing down their risk to that which is in line with the majority. In such cases it would be more
economically efficient for the government or communities to invest in collective flood protection
measures rather than cross-subsidising highly exposed properties. This has been the chosen option in
the Netherlands where the public policy priority has focused on bringing the possibility of flood as close
to zero as possible for all members of the risk community. Thus in the Netherlands the condition of
randomness of a flood event occurring is enhanced by the construction of flood protections that - up to a
point - protect all members of the Dutch flood risk community equally. Whether floods that are caused by
lack of maintenance are truly random events is a question peculiar to the Dutch context. In such cases it
is a preventable man-made failure that has been exposed by extreme weather. Whether this type of
flood would be insured under private arrangements is not clear. It was excluded from the Association’s
2012 proposal (EP, 2013).
High or unaffordable premiums without state subsidy are the price signals that free market enthusiasts
point out are necessary to persuade policyholders to self-select out of high risk properties. Without such
signals the efficient operation of a free market in flood insurance is hampered. This market signal
confusion is a potential problem with mixed public private compensation systems where the conditions
upon which the principles of insurance should operate can be inconsistent. For example, in mandatory
flood insurance systems without premium differentiation, and where strong government planning
controls are missing, homeowners who choose to live in high risk areas are in effect being subsidised
from the premiums collected from policyholders who live in lower risk zones.
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