Investigating moral hazard and property-level flood resilience measures through panel data from Germany

Abstract

Property-level flood resilience is an important element of managing current and future flood risk. Government-provided flood protection infrastructure alone cannot fully prevent flood impacts. Property-level flood resilience can aid in the management of risk through two interconnected avenues of individual action. The first is through risk transfer (insurance), which provides post-disaster compensation so that the recovery process is enhanced. The second is through property-level resilience measures, which are strategies aimed at limiting flood damage. Well-designed insurance schemes could incentivise insurance policyholders to employ additional property-level flood resilience measures. However, insurance can equally be argued to disincentivise the employment of property-level flood resilience measures, as the policyholder's losses will be compensated by an insurance company. This latter impact has been referred to as moral hazard, and its systematic presence in disaster insurance markets jeopardizes the industry's sustainability. However, the presence of moral hazard is context dependent. Therefore, it is necessary to study whether moral hazard is present to understand how resilient society is. We study the presence of moral hazard in Germany using a panel dataset, resulting from a longitudinal survey following a flood in 2013. The panel provides insights into dynamic mechanisms concerning moral hazard that would remain hidden in a cross-sectional survey, a dataset that is more widely used in the current literature. We did not find indications for the presence of moral hazard in Germany overall, but a continuing positive association between insurance purchases and the employment of flood resilience measures despite the overall increasing coverage rates.