Flood Insurance Study Case

Flood Insurance Study Case UK: Flood Re Scheme - Problems with the "bundled" model:  Households in flood-prone areas found it difficult to insure at affordable premiums  Complaints that low-risk householders were subsidizing high-risk properties  Insurance industry complained that UK Government did not do enough for flood prevention - Solution: launch of Flood Re in April 2016 (pursuant to Water Act 2014, Part 4) - How Flood Re works:  Flood Re is a not-for-profit reinsurer that offers reinsurance at subsidized prices (reinsurance premium) for insurers that insure high flood risks  Subsidized premium is funded by a levy paid by all UK insurance companies that offer property insurance  Levy costs are passed on to policyholders via premium for homeowner property policy (that element of the premium is based on Council Tax (local property tax) banding so that higher income households pay more than less affluent ones)  As a result of the reinsurance support, property insurers can offer homeowner property insurance at affordable premium to all householders, even if the property is located in flood-prone area  From April 2022, 'Build Back Better' initiative: enables flood victims to repair their homes with flood resilience and resistance measures. The scheme allows people, through participating insurers, to claim up to £10,000 for flood resilience over and above the cost of work to repair damage caused by a flood. Flood Re Scheme: Fit For Purpose?  Flood Re has now been in operation for 6+ years  Positives: 1. High penetration of flood insurance cover 2. Build Back Better initiative 3. Reduction of premiums for households with prior claims 4. No distortion of competition as all UK property insurers pay levy 5. No financial liability for UK Government  Criticisms: 1. Premiums and policy structure are not risk-reflective: does not incentivize policyholders to take flood prevention measures Initially, the UK Government did not keep its side of the (implicit) bargain to invest more in flood risk prevention measures but has now pledged up to £5.2 billion funding for flood and coastal erosion defenses 20212027 2. With flood cover being available, house-building schemes in flood prone areas are still going ahead Only applies to private homes, not business premises  Only intended to be temporary scheme until 2039 - by then the UK property market is intended to have moved to risk-reflective premium pricing  Compare and contrast: US, France and Germany USA: National Flood Insurance Program (NFIP) - Created in 1968 as result of the failure of private sector flood insurance market to provide (affordable) flood insurance - How the NFIP works:  Government-run and backed scheme that provides add-on (i.e. stand-alone) flood insurance cover to eligible homeowners  Eligibility of homeowners and small businesses who are resident in communities that have joined the scheme  Those communities must adopt and comply with floodplain management regulations and take risk mitigation measures  - Premiums are set and subsidized by Government More than 22,000 communities participate and over 5 million NFIP policies in force France: Loi n°82-600  Loi n°82-600 relativeà “ l'indemnisation des victimes de catastrophes naturelles”  How it works: 1. Flood (and other natural catastrophes) cover is bundled into homeowner property insurance sold by private insurers 2. Government maintains pool of capital by collecting a portion of all premiums to pay for flood claims via State-sponsored reinsurance (Caisse Centrale de Reassurance 3. System supervised by the Bureau Central de Tariffication (which also supervises other compulsory or quasi-compulsory 4. insurance) 5. Claims: amount that can be claimed depends on the cover agreed in the policy 6. Premium: fixed by law as a percentage of the premium charged under the main policy 7. Excess fixed by law  As Government backs the scheme financially, it is incentivized to implement risk mitigation and flood defense measures  Issues: 1. Homeowners can only buy flood cover as part of homeowner property insurance 2. Natural catastrophe claims can only be paid if Government declares a 'catastrophe naturelle' Germany: Free Market Approach - Flood coverage is optional and add-on - No pooling or Government subsidy on premium - As a result, flood cover is unavailable or only available as add- on at high premiums to those who need it most - Philosophical approach under this model is that the risk of flooding and other natural catastrophes should be taken into account by property owners when they build or purchase their property - Following heavy flooding in Summer 2021, fresh debate on whether flood insurance should be obligatory and whether there should be ban on new developments in high-risk areas