University of Twente Student Theses


Flood insurance: public or private? On the desirability and feasibility of flood insurance in the Netherlands

Thompson, K. (2013) Flood insurance: public or private? On the desirability and feasibility of flood insurance in the Netherlands.

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Abstract:Unlike other European countries, the idea of private flood insurance is uncommon in the Netherlands, until quite recently, only one insurer is offering flood insurance. This is quite surprising because the Netherlands is unlike other European countries situated below sea level. Since the flood catastrophe of 1953 the Dutch government has been responsible for flood defenses and flood damage compensation, and still is to this day. What benefit would private flood insurance have for homeowners who are at risk of flooding in the Netherlands? Flood insurance premiums can be differentiated according to the flood risk of a household. This will result in economic incentives to mitigate risks in order to lower premiums, these risk mitigations will minimize potential damages that may result from a flood. Furthermore, higher premiums in areas of high flood risk may lower property values near water, this will give economic incentives to build homes in certain ways and certain locations keeping flood risk in mind. Despite these benefits, insurers are less likely to be able to cope with larger floods. The nature of flood disasters are that a lot of damage is being done in a short amount of time, insurers may not have reserves at hand, leaving homeowners without compensation. In such situations government assistance can be considered in order to cover the shortcomings of insurance companies. Taking the difficulties of covering flood risk in mind, is private flood insurance feasible in the Netherlands? In terms of flood risk, individual insurers are reluctant to offer flood insurance because they may run the risk of going bankrupt. It may be more feasible if multiple insurers work together in offering flood insurance and pool their risks, reinsurance on the international market is also an option. Another problem for insurers is that homeowners are generally unaware of their flood risk, meaning they have insufficient demand for flood insurance. Homeowners are also reluctant to purchase flood insurance because they have the expectation that the government will support them in the event of a disaster. In current conditions, the idea of private flood insurance is not feasible in the Netherlands. Insurers in the Netherlands have no prior experience of estimating flood risk, and also have limited capacity of coping with larger flood catastrophes. There is also little demand among homeowners for flood insurance due to unawareness of flood risk and the expectation of government assistance. That said, conditions more favorable to flood insurance can be realized in cooperation with the government. For instance the government can create certainty by not compensating flood damages below a certain amount, effectively making citizens partly responsible for their own risk, providing opportunities to offer private flood insurance.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:88 social and public administration
Programme:Public Administration MSc (60020)
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