De Ruig is a consultant on flood risks and adaptation at Royal HaskoningDHV. Together with four Dutch and two American researchers, he has published a paper on the future of American flood management. That paper was recently published in the scientific journal Nature Climate Change. "I'm curious to see how our research (How the USA can benefit from risk-based premiums combined with flood protection) lands in the US. Many studies only look at the insurance system or the role of the government. We looked at the big picture."

What have you done differently?

"Flood risk in the US involves three major actors: the government, households and the insurance market. We have included this complete triangle in our research, for which we have used a so-called Agent-Based Model . That is a kind of computer simulation that allows us to observe interactions between people, things, places and time. The technique has been around for some time, but is usually only used in small-scale projects. We have now used the model on flood risk in the US in order to be able to establish a link between these three actors. That sounds more complicated than it is, because we actually just investigated what consequences the choices of one party have for the other."

These three actors each have their own role, but those roles are related?

"Exactly. Let me start with the role of the first, the government. The government can take (often regional) measures, for example by constructing dikes. We have an active government in the Netherlands, which builds many defenses to protect us from the water. In America, that's a lot harder. It is a large country, with almost 100,000 miles of coastline and also many large rivers. America, like us, cannot line the entire coast. So choices have to be made. The second actor concerns households. You can take measures to protect yourself and your home from flooding. That is more established in America than in ours and that of course has everything to do with that government. If the government does nothing, you'll be more likely to go into action mode yourself. The third and final actor is the insurance market. U.S. households can also choose to cover the risks with flood insurance. If they live in a high-risk area, insurance is even mandatory, but in reality households regularly fall below that obligation."

Flooding is insurable in the US?

"A long time ago, it was decided to set up a national, public and affordable system for flooding: the National Flood Insurance Program. In so-called one in a hundred zones (i.e. areas that have an annual risk of at least one percent of flooding), insurance is offered that must be accessible and affordable for everyone."

How does the National Flood Insurance Program work?

"Financially bad. The insurance is determined per building or per house, but the premium is based on national averages. In addition, historical data are used, so that climate change is not taken into account. The risks are therefore not properly reflected in the premiums. This is technically incorrect and encourages undesirable behaviour. All in all, the approach presents two major disadvantages. In addition to anti-selection, households are deprived of any incentive to invest in adaptation measures. In the meantime, the program has accumulated about twenty billion dollars of debt."

That sounds like a bankrupt program?

"For years, more money has been going out than comes in, while almost every year debt is also canceled. So the debt is actually much larger than that twenty billion. America is also trying to improve the program. In 2012, for example, an attempt was made to assess the premium more on the risk, but that decision was reversed two years later in connection with affordability. America is struggling with that balance between premium reflection and affordability. If you want to live in a vulnerable place, you would have to pay more, but with that, affordability quickly disappears from sight. At the moment, the experts of the National Flood Insurance Program are working with new models and estimates to align the premium more with the risk, but that leads to the same problem of unaffordability. That is why we have made a model (Agent-based) for our research in which we can simulate various choices of these three groups. What does a choice of one party mean for the other party? For example, a household can opt for adaptation measures due to various triggers, but can also take out insurance. And governments can implement new adaptation measures based on cost-benefit analyses. You can simulate in different ways to see when and how the behavior changes. We have looked both at the current system, where premiums are out of step with the risks, and at a system where that is the case. Of course, we also took into account the increased risks due to climate change."

How did that turn out?

"Firstly, we have discovered that affordability for a group of households becomes really problematic if you want to adjust the premium more to the risk, while it turns out to be very beneficial for another group. With the first group you can think of people who live unprotected on or on the beach and are therefore vulnerable to flooding. They now pay an average premium, but should actually pay the main price. Conversely, it becomes very attractive for people who live just inside or outside the risk zone to take out insurance. They now pay a relatively expensive (average) premium for a relatively low risk. The second aspect we took from the simulations is that introducing a premium discount works well. Many households are prepared to take measures if they have to pay less premium as a result. A nice fact."

Is that the key to the solution? Provide the right incentive, so that people learn to think more preventively?

"Absolutely. But that's not just a big problem in the U.S. We see that in other countries as well. I was involved in a study by the European Commission, in which we did an analysis for insurance structures in Europe. A solidarity system is often popular to keep it affordable for everyone, but the initiative to take preventive measures is zero. After all, you have cheap insurance and get a benefit if things flood. So why would you cost yourself anymore?"

The coast in the US is so long that a dike offers no solution, but how acute is the problem of flooding there?

"Over the past twenty years, both the frequency and the impact and the damage burden have steadily increased. And with the effects of climate change, that's only going to get worse. The ethical question that arises is does we mind? And how bad do we think it is if the adaptation turns out to be more expensive than compensating for the damages? Many large cities in the US, including New York and New Orleans, are now busy developing adaptation measures such as storm surge barriers and dike systems. They don't have much choice either. The risks are only increasing. Something has to be done. Apart from the insurance market, we have passed on two adaptation scenarios for the US government. One scenario is reactive and simply consists of doing nothing. So that's basically waiting for things to go wrong, as was the case with Hurricane Katrina. Then you will evaluate the defenses after the disaster and possibly adjust them. The other scenario is proactive, as we do in the Netherlands, and focuses on a periodic evaluation. This means that every six years you check for each area whether it is economically efficient to apply new measures. The government has to invest considerably more in this scenario, but if you include the costs and investments of the households in this and see how it works out financially, then you as a society will get a lot better off."

How does this proactive government relate to the insurance market?

"Our research shows that proactive public investments in (regional) adaptation measures have a positive effect on the affordability of insurance premiums. With the nice side effect that many households also continue to apply adaptive measures themselves. In fact, the calculations show that the combination of a proactive government with risk-based premiums yields the highest social benefits: net 26 billion dollars over a period of thirty years. We therefore propose in our paper that the US government become proactive and focus the insurance premium more on the risk."

What can we learn from the US? Are there any lessons to be learned from your research?

"We already have a proactive government. With us, it is mainly the insurance market that is in a difficult position. The chance that a major flood will occur is very small. But when it happens, the impact is huge. Especially when the Randstad floods. We really have to think carefully about how we want to and can organize that here. Like others, we can look purely at solidarity, but if we want to organize our risks smarter in the longer term and, for example, move new construction projects to safer locations, then we can also switch to a more risk-based system."

How does that work? In the Netherlands, flooding is already partly covered and, moreover, we have the Disaster Damage Compensation Act, which the government can declare applicable in the event of a flood?

"Our system is changing rapidly. That is also desperately needed," responds colleague Detmer Koekoek, who has listened so far and knows the Dutch insurance market better than De Ruig. "Until recently, we mainly relied on the government (just think of dikes, building decrees and the Disaster Damage Compensation Act). The flood risk was only very limited insurable. That situation is no longer sustainable in the future. Insurers are also responding to this. Local floods and floods from secondary barriers are more insurable for private individuals, but only very moderate for the business market. For flooding of large rivers and the sea, the primary barriers, there is no insurance (yet). We think we are safe and covered, but the question is whether that is justified. Especially if climate change entails even more risks. Looking to the future, we really need to work on a better insurance system, because the law does not offer a long-term solution. Lars said earlier that flooding in the Netherlands is complex and I therefore wonder whether solidarity can be a solution for all risks."

During a webinar of the Dutch Association of Insurers earlier this year, you emphasized that flooding and adaptation measures are location-sensitive. Does that make it difficult to impose solidarity? Someone in the east of the Netherlands does not need flood insurance, does it?

Koekoek: "That's right, the east has on average a lower flood risk than the west, which lies lower. But it is also changing in the east. For example, as a result of heat and drought, the soil can dry out, so that local floods after extreme rainfall can also cause damage there. Yet someone in such a low-risk area will not be happy to pay the same premium for flood insurance as someone in a high-risk area. I think that will be the biggest challenge: finding a balance between solidarity and risk inequality."
De Ruig: "Our system is much more complicated than in the US. We have primary and secondary barriers, different types of flooding and that makes it difficult. In any case, it is already complicated to map out all the risks. And once they have been mapped out, what do those risks mean for the insurance market? How does that reflect on premiums? And how can we stimulate adaptive measures in that system? That's quite a task."

Should the government and insurers in our country work together more to achieve a sustainable insurance solution?

Koekoek: "Yes. The current system is unclear, contains gaps and is not future-proof. If we want to come to an insurance solution for flooding, close(er) cooperation between government and insurers is needed, just as we already see in many other countries. And when we want to provide insurance for primary barriers (the sea and the big rivers), we can do a few things. Firstly, we need to learn from other countries, such as lars' research for the US, and we also need to learn better how our risk works. This is possible if we make better use of the best available flood data. Thirdly, we need to be more open to different insurance structures. We tend to take a position (too) quickly. And finally, adaptation, prevention and information provision are of great importance. Both the government and insurers must tell more and better about the risks and also set requirements for them. Prevention is better than cure. Because let's face it, even if you have insurance, you don't like it when your house is flooded."
De Ruig: "Agree. We should not underestimate this awareness. If we now do a sample and ask people on the street if and how they are insured against flooding, probably no one will have an answer to that. They have no idea."

And now? Awareness-raising is lesson one?

De Ruig: "Certainly, but preferably in combination with an insurance solution. Otherwise it is more panic-mongering and we will not make any progress. We must now first do research to determine which insurance system is the best fit for our country. Of course, we have to look at affordability, the expected funding ratio and how we can activate households to take risk-reducing measures."
Koekoek: "It's very bland, but we now also see it with the energy crisis: people often only move when they feel it in their wallets. With car insurance, it is fully accepted that you pay a different premium depending on your zip code and the brand of car. That is the consequence of a choice you make yourself. The same principle applies to flood insurance. Only when there is a difference in premium between the different risk areas will households make different choices when choosing their home or taking adaptation measures. Also look at other forms of insurance. Fire prevention is high on the list of all insurers. People are given preventive measures and the fire detector is not only accepted, but even mandatory in the Netherlands. We are not there yet with regard to flood risks. Households are not sufficiently informed and incentivised to cope with these risks, now and in the future. There lies a nice, joint task for the government and insurers. Prevention and adaptation must be part of the solution to make flooding insurable and affordable. And in the meantime, we can of course also pay more attention to where we plan our new building."

(Text: Miranda de Groene - Photography: Ivar Pel)