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12 IntegratedDisasterRiskManagementandAdaptation 305
It is important to realise that thefinancial compensation arrangement should be
designed so that it is complementary to, and facilitates, the undertaking of cost-
effective adaptationmeasures, and not acts as a substitute or financial disincentive
for implementing suchmeasures.Amoral hazard effect canarisewhen individuals
prepare less for a risk after theyhaveobtained insurance coverage against the risk.
Thiscanoccurwhenpolicyholdersexpecttoreceivecompensationfromtheirinsurer
irrespectiveof risk reductionefforts and ifpolicyholders receivenofinancial incen-
tives, like lowerpremiums, from their insurer to limit risk.This canposeproblems
for the insurerwhendue to information asymmetries, the insurer does not observe
theheightened risks takenbyaparticular policyholder.This implies thehigher risk
isnot adequately reflected inahigher risk-basedpremium.Moreover, suchamoral
hazardeffect isevidentlyundesirablewhenclimatechangeincreasesnaturaldisaster
riskssince ithampers the implementationofadaptationmeasuresbypeoplecovered
by insurance.
Hudsonetal. (2017)examinedtheexistenceofthismoralhazardeffectusingdata
fromsamplesofhouseholds livingalong the riverElbe inGermany.This isdoneby
estimating relations between flood insurance coverage and the implementation of
flood damagemitigationmeasures, and by estimatingwhether flood damage out-
comesdifferbetween the insuredanduninsured,whilecontrolling foradiversityof
other relevant explanatory variables. The results show that amoral hazard effect is
absent (Hudsonet al. 2017). Inparticular,flooddamagesof insuredhouseholds are
notsignificantlyhigherthanthoseofuninsuredhouseholdswhendifferencesinflood
hazardcharacteristicsareaccountedfor.Moreover, individualswithfloodinsurance
coverage aremore likely to have taken specific flood damagemitigationmeasures
thanpeoplewithoutfloodinsurance.Theseinsuredindividualsdidnotreceiveapre-
miumdiscountfortakingflooddamagemitigationmeasures,whichimpliesthatother
reasonsexplainwhythe insuredwerebetterpreparedforfloodrisk.Theresultssug-
gest that behavioural characteristics, like high risk aversion, imply that individuals
havepreferences forboth insurancecoverageand riskmitigation.
Although the relationsbetween risk reductionandnatural disaster insurancehas
receivedlittleempirical research(seealsochapterbyLinnerooth-Bayeretal.2018),
the findings by Hudson et al. (2017) do not stand by themselves. Thieken et al.
(2006)alsoobserved that individualswithflood insurancecoverage inGermanyare
betterpreparedforfloodingthanpeoplewithoutfloodinsurance.Botzenetal.(2017)
findpositive relations between havingflood insurance coverage and implementing
flood-proofingmeasuresamonghomeownersinflood-proneareasinNewYorkCity.
Hudsonetal. (2017)showthatsimilarpositiverelationsbetweeninsurancecoverage
andrisk reductioncanbe foundforwindstormrisks in several areas in theU.S. that
were impactedbyhurricanes Irene, Isaac, andSandy.Thesefindings are consistent
with positive relations betweenwindstormcoverage andwindstorm risk reduction
activities reported inCarsonet al. (2013)andPetrolia et al. (2015).
Additional calls have beenmade to design natural disaster insurance arrange-
ments in away that they incentivise risk reduction by policyholders. For instance,
insurance could reward investments in damagemitigationmeasureswith premium
discounts (Kunreuther 2015). There are few examples of flood insurance arrange-
Loss and Damage from Climate Change
Concepts, Methods and Policy Options
- Title
- Loss and Damage from Climate Change
- Subtitle
- Concepts, Methods and Policy Options
- Authors
- Reinhard Mechler
- Laurens M. Bouwer
- Thomas Schinko
- Swenja Surminski
- JoAnne Linnerooth-Bayer
- Publisher
- Springer Open
- Date
- 2019
- Language
- English
- License
- CC BY 4.0
- ISBN
- 978-3-319-72026-5
- Size
- 16.0 x 24.0 cm
- Pages
- 580
- Keywords
- Environment, Climate change, Environmental law, Environmental policy, Risk management
- Categories
- International
- Naturwissenschaften Umwelt und Klima