Insuring private property for flood compensation: challenges and bountiful problems

In the blogger's memory, after the inimitable example of the 1966 Florence flood, private citizens have never been fully compensated for floods. Very often they have received only partial compensation, and the promises and subsequent institutional disputes over the issue have been as dull and fruitless as the cries of seagulls following a fishing boat because they think the sardines will be thrown into the sea. Risk is increasing rapidly, not so much because of the perceived increase in water hazards, but because of the huge and uncontrollable increase in exposure and inaction to vulnerability. Thinking about public coverage for private damages is pure illusion.

Huge damage has been caused in Emilia-Romagna

comparable to the flooding two years ago in Germany. For Germany, the 2021 summer floods were the worst natural disaster in the history of the insurance industry, which paid out 6.7 billion of the 8.4 billion euros in total property insurance losses. But the rest of the damage, three times as much, was left at the expense of individuals and the government, at the expense of their property and infrastructure.

A recent report from Verisk

one of the leading analysts of insurance risk, shows that only a small part of the damage caused by the May floods in Italy is covered by insurance. Most of the risks foreseen by the Italian insurance market do not take floods into account, as the same report shows. Many years ago, proposals for insurance coverage of hydrogeologic damage, supported by part of science and civil defense, were rejected under the slogan: no new taxes. It is likely that they would have been accepted given the rigid and blind content of the proposals.

Flood insurance would have two important roles.

First, it would provide the necessary funding to rebuild after an incident, which sometimes requires significant economic effort. In many cases, companies affected by the floods were unable to reopen, and sometimes the impact on the entrepreneur was even tragic, to the point of leading to suicide. In addition, insurance companies have a direct relationship with owners and can ask to activate self-protection measures when taking out an insurance policy.

Insurance is a typical tool for risk sharing and mitigation. To understand which insurance system might be best for Italy, it is worth looking at the variety of solutions from countries that have already adopted risk insurance policies. In extreme compression, there are three types of systems: mandatory, semi-mandatory and voluntary, with many aspects. A recent white paper by Cineas offers an overview of possible pathways based on the experience of other countries.

For example, in countries with high seismic risk

such as Turkey and Romania, insurance is mandatory, but only against earthquakes. Iceland is the only western country that mandates flood insurance. In this small country, which has a very developed social safety net, natural catastrophe insurance is compulsory and all private properties are insured.

The semi-mandatory system provides for catastrophe insurance.

as an additional condition to fire insurance.

How much is paid in a semi-compulsory system? In France, the law prescribes a fixed percentage of the premium from fire insurance. This is a very proven system that was introduced in a market where basic fire coverage was already significantly developed. And rumor has it that the injured person should be paid within three months of the claim. Unfortunately, the share of fixed fees has grown from 6 percent to 12 percent over the years and continues to grow. This explains how hydrogeological disasters and wind storms increasingly threaten France, whose urban and rural development is clearly little sustainable.

In Spain, the premium is also fixed, but the state also acts as the final reassurer. The public arm intervenes if the compensation consortium running the system, which operates as a private enterprise with an obligation to build up technical reserves and comply with solvency criteria, cannot cope.

In many other countries the system is voluntary, from the UK to Germany, Japan and the US. In the English system, there is no regulatory intervention from the government and insurance is usually required for mortgages. The government provides no compensation in the event of a disaster, but a special consortium (Flood Re, in partnership between the government and insurance companies) lowers the cost of premiums in areas at high risk of flooding to expand the number of people insured.

In the United States, the national flood insurance program covers only 18 percent of properties. But it is a very targeted system, a primary pathway highlighted many years ago by the Federal Emergency Management Agency to mitigate flood risk, along with reducing vulnerability. Individuals are motivated to provide at-risk properties with permanent or temporary flood protection measures to obtain insurance coverage at affordable premiums. The premium depends largely on the exposure and vulnerability of the insured property, not just the peril.

Of course, you can't just take a system and blindly export it to another place, especially if that place is Italy. We need to assess the specifics of risk along with the specifics of the social and economic structure if we don't want just empty vanity and perhaps some self-interest. In a country that Giustino Fortunato called "a destructive beacon on the sea" more than a century ago, there is still much work to be done in this area.