German Economic Think Tank Calls for Compulsory Flood Insurance

By Ulrike Dauer

A German economic think tank has proposed that building insurance against flood-related damage become compulsory, as governments, individuals, companies and insurers in Central Europe grapple with the cost of repairing the devastation caused by recent widescale flooding.

Compulsory insurance for all buildings would limit individual payments required to repair losses when caused by floods, storms, earthquakes and storm surge, said the DIW Deutsches Institut fuer Wirtschaftsforschung, one of the economic research institutes advising the German government.

Costly disasters are on the rise in both rural and urban areas, whether they are due to climate change or not, the DIW said, echoing comments by the Geneva Association, an international think tank set up by the insurance industry. As a result, the European Union is also considering new flood protection regulation.

Only about 30% of buildings in Germany are currently insured against flooding, according to figures from Germany's GDV insurance association. Commercial insurers consider 1% to 2% of all buildings in Germany are uninsurable--either because they are frequently affected by flooding due to being close to water, or because regular claims would make insurance too expensive.

The DIW proposes compulsory flood insurance with staggered policyholder deductibles--depending on the risk zones in which buildings are located--to ensure the policies are affordable and there is sufficient interest in buying them, while also ensuring flood prevention isn't neglected.

In addition, the DIW proposed the German government offer a loss guarantee for claims above 8 billion euros ($10.7 billion).

Many fear losses caused by the latest flooding could be higher than the economic damage of EUR16.8 billion and insured losses of EUR3.5 billion that resulted from the August 2002 floods, which were then considered a once-in-a-century event.

On Thursday, Germany's government set up a national reconstruction fund of up to EUR8 billion for losses caused by the latest floods.

Write to Ulrike Dauer at [e-mail]

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