Natural disasters: compulsory insurance must come – economy

Of course, climate change is not directly responsible for the catastrophic flooding this summer in Rhineland-Palatinate and North Rhine-Westphalia. But global warming will make such disasters more frequent. The risks of nature evolve and become more and more difficult to calculate. The alarming images of the devastated communities of the Eifel make it clear to everyone what this means.

This is not just immediate disaster relief, but also long-term consequences: river renaturation, flood protection and warning systems whose messages understand and take those affected seriously. And it will be a question of better predicting material damage. Therefore, politicians, scientists and lobbyists are now asking whether all homeowners should not be forced to insure not only against fires and storms, but also against water damage. So in Germany, as is already the case in France today, does it have to be compulsory insurance against natural risks?

The question of whether and how people or goods should be insured is one of the central questions of economics. British historian Niall Ferguson writes: “The history of risk management is a long struggle between our futile need for financial security (in the future) and the harsh reality that there is no ‘future’ in the future. singular. different and unpredictable futures that will never cease to catch us by surprise. Good insurance was in the early days of the European welfare state – from widows and orphans funds in Scotland in the 17th century to social security and general local health insurance funds in the German Empire.

Good insurance is also necessary to deal with increasing natural hazards. What bad insurance can do was demonstrated in August 2005 when Hurricane Katrina and subsequent flooding devastated large parts of the city of New Orleans. With $ 60 billion in insured damage, Katrina was the costliest natural disaster on record (in Germany it is expected to be at least five billion euros this year). Three-quarters of the buildings in New Orleans have been damaged or destroyed.

The problem: Storm damage was insured by private companies, while flood damage was covered by a public insurance company. As a result, as Ferguson writes in his book The Ascent of Money, thousands of insurance agents crossed the affected states of Louisiana and Mississippi after the accident. “Their job was not to help the insured, but to avoid payment by claiming that the damage was due to the flood and not the storm.” In the end, the US state had to pay $ 109 billion, three times the estimated losses to insurance companies. Large parts of the Gulf Coast were then considered uninsurable, particularly communities where many poor lived.

After all, the industry “learned essential lessons” after Katrina, says Ernst Rauch, chief climatologist and geohazard researcher at reinsurer Munich Re. This included advancements in tropical cyclone modeling and prevention, for example through to better dikes, barriers and pumps, more stable structures and compensation areas. “What is essential is better physical and financial resilience to such storms and associated floods.”

So far the state has always had to help with a lot of money in disaster situations – not very effectively

Even so, heavy rains in the Eifel are much less destructive than a hurricane in the Gulf of Mexico. Insurance premiums against natural hazards are therefore only a tenth of what you would have to pay in Florida, for example. But the risks and costs will increase. This year’s flood is the worst natural disaster in Germany since the Hamburg storm surge in 1962. Only 46 percent of the country’s buildings are insured against flood damage. There is therefore a lot to be said for acting now and making natural risk insurance compulsory.

You can then discuss the details. Should insurance be “joint and several” in the sense that each owner pays the same premium, regardless of the importance of his specific risk? No, says Ernst Rauch of Munich Re: “The premiums do not all have to be the same, but must correspond to the different risks. Otherwise, there will be false incentives ”.

Daniel Osberghaus, economist at the Center for European Economic Research (ZEW) in Mannheim, calls for a “strategic approach” to deal with natural hazards. Until now, the state has always had to help disaster with a lot of money – as is now the case in West Germany. But this is not necessarily effective. In addition, the state finds itself caught in the “Samaritan dilemma”. The term comes from the American Nobel laureate James Buchanan and describes a situation in which someone helps a person in need with the best of intentions, but thus deprives them of the incentive to help themselves.

Osberghaus advocates compulsory insurance for all. It must contain a deductible and be compulsory on both sides: insurers have no right to refuse anyone. To do this, there must be a disaster fund financed by tax revenues. It would cover part of the damage to existing buildings in high-risk areas, for example in the old town of Passau. “Otherwise, the buildings there would not be insurable and would have to be abandoned. Nobody wants that.

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