Flood insurance as a response to environmental hazard

Abstract

Insurance against the impact of environmental hazard provides a means of recovering from financial loss, but can also be used to encourage the mitigation of such losses. Consequently, insurance can be an effective response to the flood hazard. In principle, high premiums should dis- courage movement onto the floodplain, whilst premium differentials could also be used to encourage the adoption of measures to reduce flood damages. Furthermore, insurance can be made conditional upon the adoption of either individual or collective mitigation measures. On the other hand, however, the availability of insurance may stimulate floodplain encroachment, and the realisation that losses will be reimbursed may discourage loss mitigation. The United States National Flood Insurance Program is an attempt to use the potential of flood insurance to improve response to flooding. In- surance is only sold in communities which have adopted floodplain regu- lations, and variable risk-based rates are applied to new structures in order to discourage encroachment. Whilst flood insurance in the United States has been dominated by governmenj-;; actions and is integrated into floodplain management, insurance in Britain is solely in the hands of the private insurance industry and is not connected with hazard mitigation. Flood cover is a standard inclusion in comprehensive household and small business policies, and is very rarely refused. Competition during the 1970s and 1980s in Britain led to the abandonment of higher premiums for floodprone households. There is no active encouragement of flood-proofing for residences, although companies occasionally make insurance for com- mercial properties conditional upon the raising of stock. Incorporation of flood cover into standard household policies in Britain means that possession of flood cover is not indicative of conscious res- ponse to the flood hazard. However, insurance coverage remains variable, and surveys in Selby, York, Gillingham and Tonbridge showed that lower status, tenant and pensioner households were less likely to have any property insurance cover. Flood relief is an alternative means of pro- viding for recovery from loss. In Britain it is limited to aid from public subscription funds, and since such aid cannot be guaranteed flood relief has an insignificant effect on insurance possession. Temporal variations in flood loss imply that long-term premium income must be sufficient to cover long-term claims payments, and consequently premiums must be based on average annual flood losses. A method for estimating average annual damages based on standard hazard and damage data is presented. It is concluded that the study of insurance provision in Britain aids academic understanding of overall response to hazard, but future changes in the availability of flood insurance may give the studies a more practical value.

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