Charity hazard and the flood insurance protection gap: An EU scale assessment under climate change

Max Tesselaar, Wouter Botzen, Peter J. Robinson, Jeroen C.J.H. Aerts and Fujin Zhou

Ecological Economics, 2022, vol. 193, issue C

Abstract: The flood insurance protection gap, the level of uninsured flood risk, is a problem faced by many European countries and is expected to increase due to climate change. In some countries a cause of low demand for flood insurance is the crowding out of private insurance uptake due to the anticipation of government compensation for uninsured damage, a phenomenon known as charity hazard. This study applies a partial equilibrium model of flood insurance markets to explore the extent of charity hazard and the insurance protection gap for EU-countries until 2050. For this analysis, we apply an expected utility framework with insurance purchase decision functions that capture the probability, ambiguity and extent of government compensation. By accounting for country-level insurance systems and government compensation types, as well as regional flood risk, we aim to assess how charity hazard develops under different conditions. The extent of charity hazard decreases with uncertainty of government compensation, as well as with higher flood risk. Considering current and future conditions, the highest impact of charity hazard is observed in regions of Germany and Italy. The projected insurance protection gap is highest in Germany, followed by Spain, Poland and Italy, and is expected to grow towards 2050.

Keywords: Flood risk; Flood insurance; Charity hazard; Insurance protection gap; Partial equilibrium modelling; Climate change adaptation (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolec:v:193:y:2022:i:c:s0921800921003487

DOI: 10.1016/j.ecolecon.2021.107289

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