Adaptive flood management: the role of insurance and compensation in Europe

Large-scale floods have the potential to generate substantial economic losses. Within Europe, governments have dealt with these losses in different ways, which may or may not have enhanced adaptability of their societies. In this research we develop a classification of insurance and compensation systems to deal with losses from floods. We suggest that, from the perspective of adaptive capacity to uncertain future risks, commercial flood insurance is to be preferred on the basis of the assumption that commercial insurance premiums are better capable of transferring price signals of actual flood risks. Such systems can therefore give stronger incentives for risk reduction. Next, we describe the actual insurance and compensation systems for dealing with flood losses that have been set up in 19 European countries. Our findings are that the availability of commercial flood insurance is widespread in Europe. However, actual market penetration can be called high (50% or more) in only 7 countries. To get an indication of the dynamic behind this, we statistically assess whether or not the choice of flood risk management system and factors such as market penetration are related to flood risks and socioeconomic aspects, such as population size and GDP. This analysis indicates that country surface area and population size seem to be the dominant factors for determining the type of flood insurance system, and therefore possibilities may exist in some European countries to increase the share of commercial flood insurance. In some countries flood hazards and flood risks may be too high for the private sector to provide full cover. This implies also that there is a continued role for governments in helping to increase the market penetration of private flood insurance, as well as for loss prevention programmes. Further harmonisation of insurance regulation in Europe could increase the possibilities for private insurance companies to take on risks.