Improving preparedness for low-probability/high-impact flood risk (2014-present)

FloodEurope has repeatedly experienced damaging floods, such as $16 billion flood losses in 2013. Due to urbanization in floodplains and climate change flood risks will rise, meaning that flood risk management needs to be improved. There is already a wide diversity of arrangements for compensating flood losses in the EU, but these are insufficient for covering the expected risk increase. Flood insurance could limit risks through risk-based pricing, and reward the ‘flood-proofing’ of property with premium discounts. However, there is limited evidence about the effectiveness of such financial incentives for risk reduction.

To address these topics, a NWO-VIDI scholarship was granted to prof. dr. Wouter Botzen. A team of four IVM researchers works on the project: professor Botzen, Jantsje Mol, Peter Robinson and Max Tesselaar.

The aim of the project is to contribute to the design of new flood insurance arrangements that offer sufficient coverage and incentivize flood risk reduction. To do so, this project will advance our scientific understanding of developments in flood risks and related uncertainties, economic evaluation of insurance arrangements, and individual behaviour with respect to flood risks. This research will have implications for other low-probability/high-impact risks.

To study individual decision making in relation to flood risks, economic experiments as well as field and real time surveys are performed. The following topics are examined:

  • individual demand for insurance in relation to risk, government compensation of damage, and behavioural nudges for increasing demand;
  • positive and negative insurance incentives to invest in risk reduction and the role of social norms in flood preparedness;
  • the role of risk perceptions and communication in flood preparedness decisions.

These studies involve tests of expected utility theory as well as of behavioural economic theories. This will result in new empirical and theoretical insights into how individuals perceive and act upon low-probability/high-impact risks.

The experimental and survey results about individual decision making will be integrated in a coupled flood damage model and a supply and demand flood insurance model for representative EU countries. This model will evaluate a variety of flood insurance arrangements according to their financial feasibility, coverage, affordability, and influence on flood risks, and provides insights for reform pathways of flood insurance arrangements in the EU

Prof. Wouter Botzen is the contact person for this project: wouter.botzen@vu.nl