Edited on 16 October 2014
The ENHANCE consortium has provided a formal response to the questions posed in the European Commission’s Green Paper on the Insurance of Natural and Man-made Disasters. Our response addresses some of the key aspects of insurance that ENHANCE will focus on, including the diversity of insurance schemes in Europe, links between insurance and risk reduction, and the issue of moral hazard. In addition, we highlight some key issues that were not addressed in the Green Paper, including the need to pay greater attention to the roles and responsibilities of public and private sector players in disaster risk management and how new partnerships, beyond insurance and government, could lead to innovation.
The application of insurance to manage the impacts of natural disasters is unevenly applied across Europe, with the extent and scope of risk transfer varying from country to country. In addition, Europe displays a wide variety of insurance-systems, with some countries having a mandatory component, such as Spain, Belgium and France. Through several case studies the ENHANCE project will explore the current availability or lack of natural disaster insurance, the most prevalent flood (and property) insurance arrangements in a number of EU countries, and the role of public and private partnerships for insurance.
We argue that if designed and operated appropriately insurance can play a role in physical risk reduction and adaptation. ENHANCE will examine the scope of different economic instruments for enhancing resilience and managing risk, and develop criteria for assessing them. Economic instruments, such as risk financing instruments, private-public partnerships, taxes and others, can produce incentivising behaviour and increase the uptake and efficiency of adaptation measures. The effectiveness of these instruments in reducing risk is frequently debated in the policy and science spheres, yet the evidence base on their effectiveness remains limited (even for insurance related instruments) and there are few conceptual and numerical analyses. A general assessment of what works and the most effective linkages is still missing at this stage. ENHANCE will also expand on the wider field of economic instruments (e.g. taxes, payments for ecosystem services, and water pricing), which are often overlooked and not well analysed. Little is known about the use and suitability of such instruments, and hence they will receive particular attention.
In addition, while there is a lot of rhetoric about the incentive-compatibility of insurance, the reality is marked by moral hazard. For some time now the insurance industry has been applying a variety of instruments (e.g. deductibles, excesses, co-insurance and other exclusions) under the terms and conditions of insurance contracts in order to avoid moral hazard, maintain insurability and offer affordable premiums. This is well established in some insurance classes (such as commercial insurance for large risks and motor-insurance), but the effectiveness in reducing moral hazards in the context of natural catastrophe risks remains unclear. The ENHANCE project will investigate this issue further.
Finally, we argue that more attention should be paid to the roles and responsibilities of public and private sector players in disaster risk management and how new partnerships, beyond insurance and government, could lead to innovation. Public and private insurance operate under very different conditions, which has implications on how issues, such as moral hazard and risk reduction, can be addressed. The ENHANCE project is assessing the characteristics of (un-)successful partnerships in improving resilience, and aims to identify processes for fostering novel multi-sector partnerships.
Note to readers:
ENHANCE answers to the EC Green Paper on the insurance of natural and man-made disasters can be perused on the ENHANCE website.
The initial version of the Green Paper issued by the European Commission can be downloaded here.