7.2 How to provide sufficient money for recovery?

Two main approaches to funding flood recovery in the STAR-FLOOD countries are private insurance and State-funded compensation. Yet, there are large differences in how these schemes function in each country. These differences reflect the different perspectives on flood risk responsibilities. In England and Sweden, flood protection and recovery are, legally speaking, the responsibility of individuals. Therefore, flood recovery is often funded through private insurance mechanisms. In France, the principle of solidarity is established in the constitution, which may account for the presence of both public and private arrangements. In the Netherlands, the limited availability of insurance can be attributed to the high standards of protection and the duty the State has in protecting its citizens. As flood risks increase due to climate change, countries are encouraged to reconsider and improve their insurance systems. The call for risk-based approaches is becoming more pressing in all countries.

Insurance mechanisms vary in terms of their level of cooperation with the State. The spectrum ranges from the English insurance system with little State intervention to the French system that is largely State governed. In most countries flood insurance is tied to general household insurance and/or linked to fire insurance. This bundling provides the advantage of spreading the risks and costs between all policyholders and contributing to a high penetration rate. On the other hand, this approach can limit the extent to which property owners are encouraged to stay away from flood prone areas or to adapt their own properties. In addition, it raises premiums for people living outside of flood prone areas.

In Belgium, private flood insurance has been introduced to shift the responsibility for recovery from the State towards the individuals affected (and hence the market). This system of risk-differentiated premiums is used to discourage individuals from building in high-risk areas. A premium cap was set by the government for floods, but this does not apply to buildings built in those areas after 23 September 2008, and there is a disaster fund to back-up the private insurance (see §7.2.2). In France, private insurance is provided in partnership with the State, which guarantees reinsurance covering extreme events. Reinsurance enables lower premiums and makes country-wide coverage possible, regardless of the degree of risk (see §7.2.3). In the UK the English insurance system is currently under reform, with the short term aim that cross-subsidies for high risk properties are to be pooled across the industry to maintain affordability. The longer term aim is for the cross-subsidies to be slowly removed in an attempt to encourage home owners to take risk reduction action (see §7.2.1).

In the Netherlands and Poland, compensation for flood damage remains in the public, rather than the private domain. In the Netherlands the system of high safety standards and compensation mechanism (see §7.2.4) does not encourage citizens to insure themselves. Only one company offers flood insurance for major flood events. In Poland citizens and companies are responsible to fund their own recovery. Yet, state aid and compensation are expected in the event of a flood, and have been provided by the State in the past. However, this is not a formalised and uniform approach and is therefore not a secure source of compensation. Even for France and the Netherlands – where public compensation mechanisms are established by law – critics have pointed to the fact that compensation is influenced by political will and public pressure.

Beyond citizen-based recovery, financial recovery mechanisms to support local authorities in their recovery efforts also exist in England, Sweden and the Netherlands. In England this arrangement takes place through the Bellwin Scheme (see §7.2.5). In Sweden and the Netherlands, government grants may be provided after severe events. These grants are decided on a case by case basis (STAR-FLOOD Deliverable D5.2, see §8.2.1).

7.2.1 Flood insurance and reinsurance: England

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Flood insurance in England is provided as part of general household insurance (buildings and contents) and therefore sits within a broader policy domain of household insurance and reinsurance provision. It has a high penetration rate. Flood insurance is the primary mechanism by which individuals and businesses are able to ensure financial assistance following flooding.

From 2016 a not-for-profit reinsurance fund, Flood Re, will be introduced. The introduction of Flood Re aims to ensure that in the medium term flood insurance is accessible and affordable to all (under the Water Act 2014). Flood Re will be a pool-backed system whereby the premiums of properties at high risk will be capped and subsidised by the pool. Although the majority of households will not be affected, the new approach enables the formal cross-subsidisation of those properties at higher risk of flooding and the provision of a premium cap, thereby limiting the cost of insurance to those households.

Flood Re will introduce additional complexity within the domestic market, with a company set up by the industry to manage the reinsurance fund and an increased regulatory role for government. Those companies providing flood insurance remain subject to the same general national and EU rules about financial service provision; however Flood Re has necessitated the introduction of additional legislation. Importantly, the adoption of this new approach aims to ensure the universality and affordability of insurance for the majority of domestic properties (there are some notable exceptions) and manage the transition in the long term towards risk-reflective pricing of flood insurance. However, there are some concerns about how this will be implemented in practice and whether this new insurance/reinsurance scheme is doing enough to encourage adaptation at the household scale.

Flood insurance has always been provided via private insurance companies, operating purely on a market basis. However, the new scheme, Flood-Re, suggests a higher degree of Government involvement and regulation, indicating a potential shift in the distribution of power between the State and the market (Defra, 2013b). The English system is an example of good practice primarily because of the high penetration rate of flood insurance as part of the general household insurance, the prolonged affordability via reinsurance and the intention for more risk-reflective pricing encouraging adaptation at the household scale (STAR-FLOOD Deliverable 3.3, see §8.2.1).

7.2.2 Insurance with differentiated premiums: Belgium

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As of the 2nd of March 2006, insurance against damage caused by floods has to be included in the ‘simple risk-fire insurance policy’. The insurance is generalised to all natural disasters (i.e. earthquakes, landslides, dike breakings etc.). This generalisation is done because all Belgian citizen runs the risk of being confronted with natural catastrophes. Although this insurance is not obligatory, 95% of owners and 89% of renters in Belgium have subscribed to this insurance.

Because not everyone has the same risk of flooding, policy makers had a lot of discussion about whether to prevent flood risk (by risk awareness-raising) or to offer affordable flood insurance for everyone (solidarity). The final Act of 17 September 2005 of the Land Insurance Contract Act balances between these two discourses. Flood risks are integrated into the widely applied fire insurance. The Act determines that the following damages should be compensated:

  • Direct damage from flooding;
  • Indirect damage, also related to measures taken by a competent authority;
  • Cleaning and demolition costs related to reconstruction and reinstatement;
  • Housing costs in a period of three months, in case residential premises have become unfit for habitation.

Yet, insurers are not obliged to cover buildings and their contents when they have been built after 23rd of September 2008 in high-risk areas.

In principle insurers have the freedom to determine themselves the premium rate they wish to apply. They make use of flood risk maps to calculate the correct tariff for a certain location, updated with damage claims. However, the Tarification Bureau defined the maximum tariff that can be asked for the policy, regardless of the location of relevant buildings and the associated (flood) risk. The only exception is again that the maximum tariffs are not applicable to buildings and their contents when they have been built after 23rd of September 2008 in high-risk areas (see also §5.4.1 for discouragements for building in flood prone areas). This mechanism thus aims at keeping people away from the water, by discouraging further construction in flood prone areas.

Also for the reimbursement of claims after a disaster an interesting mechanism is in place. An intervention threshold has been set per disaster. When more money is applied for, the excess will be reimbursed by the disaster fund (CANARA – compensation mechanism). This mechanism spreads the losses in case of major disasters between all of the fire insurers active in Belgium. Good practices are evident through the high penetration rate via integration into fire insurance, the redistribution of claims among insurers and the mechanism that discourage development in flood prone areas.

(STAR-FLOOD Deliverable 3.4, see §8.2.1)

7.2.3 Cat Nat public-private insurance system: France

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Following different natural catastrophes with severe impact in the early 80’s, the French Parliament voted the 13th July 1982 for a law for the compensation of victims of natural catastrophic events. This law forms the basis for what is usually called the Cat Nat system.

The Cat Nat system is a mixed insurance system, a sort of public-private partnership. It associates insurance companies, the “Caisse Centrale de Réassurance” (CCR)[1], other reinsurance companies and the State. The State ultimately guarantees the solvency of the system.

The Cat Nat system rests upon the principle of national solidarity. Each policyholder pays the same standardised premium rate for the insurance cover against natural hazards, whatever his exposure to the risks. An additional premium “natural hazard” is taken from all insurance contracts covering damages to properties (12% is taken and saved by the National Government in a special fund). These contracts are called “baseline contracts”[2] and are mandatory in France. Thus the penetration rate of the Cat Nat insurance is very high. Furthermore, the costs for each policyholder are considered as being modest.

Insurance companies can reinsure themselves, particularly by choosing the CCR, the only reinsurance company with a solvency guaranteed by the State.

For property owner’s to benefit from the Cat Nat guarantee, the required conditions are:

  • Properties have to be insured through the ‘baseline contracts’
  • The impacted city and event has to be recognised as being a ‘natural catastrophe’ through a joint ministerial decision based on the ‘exceptional intensity’ of the event. For flooding the threshold of this ‘exceptional intensity’ correspond to a flood or a rain event with a return period of ten years minimum. It is one of the lowest thresholds worldwide.

A further requirement is that a part of these additional premiums is taken to finance a fund for the prevention of major natural hazards (known as the “Barnier Fund” or National Fund for Major Natural Risk Prevention (FNPRNM)). This fund finances one third of the national policy for flood risk management in France. So this fund forms an interesting link with measures before a flood (Chapter 5).This system has proven to be very effective in the recovery period after a flood event, but is criticised at the same time. Although the Barnier fund is used to pay for flood risk management before a flood (see Chapter 4), the guaranteed availability of funds for recovery is generally considered as limiting prevention and mitigation actions. The perspective of being covered in case of an event does not encourage the population to take actions to limit the consequences of the catastrophes. This is the reason why potential reforms of the Cat Nat system are frequently on the political agenda (STAR-FLOOD Deliverable 3.7, see §8.2.1).

7.2.4 Public compensation fund: the Netherlands

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In case of a flood in the Netherlands, victims can be compensated through the 1998 Calamities Compensation Act. This Act compensates victims of floods and earthquakes, or calamities of a similar magnitude. The law only applies when the victim is not culpable for the damage, the damage cannot be insured and when it cannot be claimed elsewhere. In addition, it currently applies to physical damage to goods and not damage to people.

Victims are compensated for specific categories of damage designated by law, in areas that are designated as ‘disaster area’ by the national government. Damages are assessed by experts and laid down in damage reports that form the basis for compensation. By ministerial decree, specific arrangements are made regarding the compensation for each individual calamity. Provisions for damage compensation by law can be made especially for exceptional situations where no other means of compensation is available and risks cannot be insured.

This system is presented as good practice, and it illustrates a well arranged alternative to an insurance based system. However, it is noted that there is limited experience with how the compensation mechanism functions, in particular for really devastating flood (STAR-FLOOD Deliverable 3.2, see §8.2.1).

7.2.5 Bellwin scheme compensating local authorities: England

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The Bellwin Scheme is a central government-funded and organised system which provides funding for unexpected losses to local authority functions. The scheme is not only designed to provide financial assistance from flooding but from a range of different types of incidents which require emergency expenditure.

Examples of the types of circumstances whereby local authorities might seek assistance under the Bellwin approach include the costs of evacuation and temporary accommodation of residents or the costs of initial highway repairs where a tree has fallen.

At a central government level the scheme is administered by the ministerial Department for Communities and Local Government. Those seeking funds at the local level are required to submit an application detailing eligible expenditure to this department.

The Bellwin scheme is a good practice as it enables local authorities to recover from floods, but one may argue that the scheme could do more to ensure that these authorities take preventive actions before a flood (STAR-FLOOD Deliverable 3.3, see §8.2.1).

[1] National Reinsurance Company, CCR is a reinsurance company tasked with designing, implementing and managing efficient instruments providing reinsurance cover for exceptional perils to meet the needs of its clients as well as serve the general interest.

[2] “Contrats socles” in French