Who pays the ferryman?

Floods are such frequent and potentially devastating natural events that in most countries the government has a major role alongside the commercial (re)insurance sector in managing the risk and compensating for losses.  As highlighted in the previous chapter, the escalation of flood risk world-wide means that strategies for containing and managing its impact are becoming a higher priority. In the developing world, insurance is often beyond the reach of the majority and reliance on government and aid agencies remains the norm.  In developed countries, as values at risk and the scale and frequency of flood events increase, how governments and (re)insurers respond to this exposure has become a high profile political issue.

One of the most obvious responses is for government to increase the scope of flood protection measures. However, it could be argued that such action can actually increase flood risk by encouraging development in the protected zones. Successful flood defences mean that flooding of an exposed area becomes a rare event and perception of the risk is distorted. Property values accumulate and when an extreme event occurs and the flood protection fails, the resulting losses are many times more serious than would previously have been the case.¹ The devastating floods which hit New Orleans after Hurricane Katrina in 2005 seem to bear out this theory. More than two years after the floods and after US tax-payers have already contributed USD127bn to rebuild the Gulf region, the debate as to whether and how much more to rebuild remains heated. USD6bn is being spent to upgrade the 350 miles of levees around New Orleans. But many observers argue that another Katrina-scale storm would still cause extensive damage to rebuilt properties, while investment in rebuilding will further increase values at risk.

European pragmatism

Elsewhere in the world, the question of whether and how much governments should intervene to provide flood protection has been no less urgent. Protecting against flood risk has been a fact of life for some European countries for centuries, but the issue came to the fore across the continent in 2002 when widespread floods caused economic losses of EUR18.5bn and insured losses in excess of EUR3bn.² The relatively low proportion of the cost borne by commercial insurers and reinsurers reflects the fact that in many European countries flood damage does not form part of standard residential property insurance cover. In fact, most of the insured loss in this instance was borne by reinsurers on contracts written in Germany and the Czech Republic, followed by Austria and Italy.

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In reproducing this Highlight article we would like to acknowledge the whole team and writers at Benfield Research (www.benfieldgroup.com e-mail benfieldresearch@benfieldgroup.com telephone +44 (0)20 7522 4125) whose work we gratefully appreciate.

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In our next e-newsletter we will feature a Spotlight on Cambodia. For many of us, this is a relatively quiet country somewhat overshadowed by events in surrounding countries – often violent. There is a lot happening. In our next edition of WoRdS we will look at a bit of history and what is going on there today.

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