In the Aftermath of Dresden: New Directions in German Flood Insurance

Posted: 4 May 2004

See all articles by Reimund Schwarze

Reimund Schwarze

Helmholtz Centre for Environmental Research - UFZ (Leipzig); European University Viadrina Frankfurt (Oder) - Department of Economics

Gert G. Wagner

German Institute for Economic Research (DIW Berlin); Berlin University of Technology; German Socio-Economic Panel Study (SOEP)

Abstract

The German flood disaster of summer 2002 highlighted a dilemma concerning insurance against damages caused by natural forces. On the one hand, mindful of the rising incidence of natural disasters, private insurance companies are increasingly withdrawing coverage against natural catastrophes, such as wind storms and floods. On the other, the availability of emergency relief and private donations is systematically weakening the incentive for potential victims to implement preventive measures so as to reduce the risk of damages. The dilemma is further exacerbated by the evident overestimation of the extent of damages in the immediate aftermath of natural disasters, resulting in the unnecessary withdrawal of private demand and the ad hoc reprogramming of public investment. Most of these problems could be resolved by the introduction of a general mandatory insurance against natural catastrophes. This paper proposes a practicable natural hazard insurance for Germany that is based on two principles. First, all basic natural disasters (wind storms, floods, earthquakes, etc.) would be covered by a single policy. This pooling approach would increase both the efficiency of risk coverage and the level of acceptance for the new type of insurance. Second, in the case of floods, only "once-a-century" damages would be insured. Regularly recurring floods, however, would not be covered. The state would step in as the final insurer in cases of accumulating damages, but state intervention would be strictly limited to covering extreme loss.

Suggested Citation

Schwarze, Reimund and Wagner, Gert G., In the Aftermath of Dresden: New Directions in German Flood Insurance. Available at SSRN: https://ssrn.com/abstract=517089

Reimund Schwarze (Contact Author)

Helmholtz Centre for Environmental Research - UFZ (Leipzig) ( email )

Permoserstraße 15
Leipzig, 04318
Germany

European University Viadrina Frankfurt (Oder) - Department of Economics ( email )

Grosse Scharrnstr. 59
D-15230 Frankfurt (Oder)
Germany

Gert G. Wagner

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany
+49 30 8 978 9290 (Phone)
+49 30 8 978 9200 (Fax)

HOME PAGE: http://www.diw.de/programme/jsp/MA.jsp?language=en&uid=gwagner

Berlin University of Technology ( email )

Straße des 17
Berlin, 10623
Germany
+30 8 978 9283 (Phone)

German Socio-Economic Panel Study (SOEP) ( email )

DIW Berlin
10108 Berlin, Berlin
Germany
+49 30 8978 9290 (Phone)
+49 30 8978 9109 (Fax)

HOME PAGE: http://www.diw/en/soep

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