6.2.1 Public Private Balance
France and Belgium both operate mixed public-private compensation systems. The state has clear financial responsibilities and strong regulatory powers. The UK system in the past had involved a clear demarcation between the roles of private insurers that operate the flood compensation system, while the state is responsible for flood protection investment. This distinction is however changing in the UK with the introduction of the public-private ‘Flood Re' insurance pool that ties public finances to the continued affordable insurance of high risk properties.
6.2.2 Voluntary Mandatory Status
In France and Belgium both systems are based on a form of mandatory flood insurance. Both systems involve automatically including flood insurance with other first-party property insurances. In France, the NAT/CAT is added to all property insurances. In Belgium the WN is added only to fire insurance. In theory, property insurances are possible to avoid, for example, by those on very low income who live in in private rental accommodation. In practice, regulations are such in both countries that most assets, be
15 In Appendix 4 there is a table comparing the Dutch flood compensation characteristics with the UK, France and Belgium
46 they public or private are insured against natural disasters including flood. Penetration rates are above ninety-five percent consequently.
The UK system is based on voluntary not mandatory flood insurance. It is often described as quasi- mandatory however as flood insurance is required by banks for the approval or mortgages. While flood insurance penetration rates are very high (above ninety percent) compared to global averages (twenty percent) there are a significant number of at risk properties without flood insurance compared to the more solidaristic French and Belgium systems.
6.2.3 Risk Transference Mechanisms
Reinsurance is the most common of several form of upstream risk transference. Reinsurance of flood risk is present in each of the national flood compensation systems that have been examined in the previous chapter. Private reinsurance is a key feature of the UK system where as in Belgium and France there are both private and public reinsurance options available.
6.2.4 Mitigation Incentives
Analysis of national flood compensation systems in the preceding chapter suggests that generally a system of flood insurance is more effective at reducing the potential for flood damage through the inclusion of downstream mitigation incentives to the level of policyholders. In all three systems there are financial incentives for flood protection and damage limitation present benefits for all stakeholders by de-risking the system and therefore increasing overall financial viability and hence economic efficiency of the systems over the long term (Paudel, 2012). For policyholders, mitigation incentives decrease flood damage, which, in a well functioning system, will lead ultimately to lower premiums - a form of collective return on investment. For insurers they result in fewer claims and therefore higher profits. The French and Belgian governments that are both responsible for some level of compensation are
motivated to invest in flood protection measure to avoid this payment. This incentive is not in place in the case in the UK where the government has no direct responsibility for flood compensation.
All three case study countries did, however, include some form of downstream incentive mechanisms.
The UK system has the most comprehensive range of financial incentives, or example differential premium pricing or with discounts on deductibles. In theory, UK citizens are encouraged towards flood avoidance and protection measures, which should make the whole system more economically efficient.
By implication, systems that do not integrate all these mechanisms, for example, the French or Belgian compensation arrangements could be criticised as being less economically efficient. The UK is the freest market and involves the widest range of options. The French and Belgian systems, being public private arrangements, are more solidaristic but both do include differentiation either through deductibles (France) or premiums (Belgium).
Joint state responsibility for flood compensation (or a level of compensation) and flood protection also is a form of non-market incentive as government is motivated to invest in mitigation measures to avoid public payments. Both Belgium and France intertwine state and private responsibilities and incentives.
The UK system is at risk of moral hazard on the part of the government as the responsibilities for flood compensation are in private hands.
The UK insurance system does not take into account or incentivise community based flood protection measures. This is an economic weakness. It is very often more efficient for flood defenses to be built
47 and paid for collectively at the community level. The French system has incorporated some level of community incentives for flood prevention. If a community has not adopted a “prevention of risk plan”
the deductibles charged will be higher than if they had one. The NAT/CAT therefore also provides incentives for voters to lobby local politicians to implement these plans within their communities (Faure and Bruggeman, 2008).
6.2.5 Financial Attributes
The UK system is self-financing and does not rely on public guarantees or reinsurance. Insurance companies are however encouraged to divert profits into capital reserves with tax breaks from the UK government. In France and Belgium the state has a financial role to play. In France it is through unlimited public reinsurance of private insurance company risk. In the case of Belgium the state will cover losses above a limit. As insurers are not charged for these interventions in any of the three countries, they are in effect subsidies and could be said to distort the operation of the markets (Faure &
Bruggeman, 2008).
A point of difference between the French and the Belgian compensation systems is that the regulator fixes premiums in France, whereas in Belgium insurers fix the premiums on a risk-based basis. In France, premiums do not take into account the risk policyholders face. Under the French system the level of premium the state decides in part limits the revenues of the insurers. Competition can still occur between insurance companies competing for new customers by offering more attractive property insurances, but the flood premiums they can charge will be the same as their competitors. In Belgium insurers can compete on the premiums they feel able to charge. The UK system is a total free market and outside of the defunct Statement of Principles insurers can charge what they assess to be
appropriate and more attractive than the terms their competitors are offering.
6.2.6 Risk Assessment and Mapping Tools
All three cases have shown that it is possible to map and assess flood risks accurately with today’s technology. This information can be used to identify properties and areas at higher risk and therefore direct spatial planning policy and ensure that building standards are also tailored to local flood risks.
From his comparative study Paudel (2012) finds that risk assessments arrangements are probably most effective when they combine the actuarial skills of private insurers with the state’s land use
planning powers and public infrastructure investment programmes. This is the situation found in the UK, French and Belgian arrangements.
6.2.7 Principles of Social Justice
Even when there is a high degree of penetration, as is the case in the UK, under a voluntary private system, there is a serious risk that a significant numbers of households cannot afford flood insurance.
However, even in mandatory systems, after very serious floods, insured policyholders often find that they inadequately covered for actual losses incurred and ambiguity whether compensation will be paid or not still exists. There is a concern in Belgium that the wording of individual insurance policies
excludes compensation if certain conditions are not met in. For example, the definition of natural disaster varies from policy to policy.
48 6.2.8 The Future
Going forward, the France and Belgium are likely to retain their mixed public-private flood
compensation systems. There are small reforms planned in both countries to introduce more market orientated flood risk mitigation incentives. In Belgium this takes the form of more freedom for risk based premium setting and price competition among private insurance companies. In France, there is a reform bill to propose limited risk-based premium pricing for the insurance of large businesses and local governments. At the community level there are also plans to increase incentives for risk prevention through the CCR plans. The French reform bill has, however, been criticised by the World Bank (2012) as not including any disciplinary device and for lacking adequate tools for monitoring and enforcement.
Figure 2: Future Direction of National Flood Insurance Systems (DEFRA1, 2013)
The UK is going through of systemic change however. Like most national flood insurance systems it too is moving towards introducing a greater role for government (as the above chart highlights). The UK government is ideologically committed to attempt to maintain the as much of its free market attributes as possible. Given the social welfare problems that have arisen around unaffordable insurance
premiums and lack of willingness by the private insurance industry to continue to offer flood insurance regardless the number of times of property has been flooded in the past, the government has been forced to intervene.