Dealing with Uncertainty in Flood Management Through Diversification

This paper shows, through a numerical example, how to develop portfolios of flood management activities that generate the highest return under an acceptable risk for an area in the central part of the Netherlands. The paper shows a method based on Modern Portfolio Theory (MPT) that contributes to developing flood management strategies. MPT aims at finding sets of investments that diversify risks thereby reducing the overall risk of the total portfolio of investments. This paper shows that through systematically combining four different flood protection measures in portfolios containing three or four measures; risk is reduced compared with portfolios that only contain one or two measures. Adding partly uncorrelated measures to the portfolio diversifies risk. We demonstrate how MPT encourages a systematic discussion of the relationship between the return and risk of individual flood mitigation activities and the return and risk of complete portfolios. It is also shown how important it is to understand the correlation of the returns of various flood management activities. The MPT approach, therefore, fits well with the notion of adaptive water management, which perceives the future as inherently uncertain. Through applying MPT on flood protection strategies current vulnerability will be reduced by diversifying risk

Insurance instruments and disaster resilience in Europe - insights from the ENHANCE project

Improving multi-sectoral collaboration is one of the core aims of the project ‘Enhancing risk management partnerships for catastrophic natural disasters in Europe’ (ENHANCE), FP7 research consortium, led by the Institute for Environmental Studies, VU University Amsterdam. Under ENHANCE new risk scenarios and hazard information have been developed and shared with multi-sectoral stakeholders across different case studies, in order to support the development of innovative approaches to DRR

Uncovering the veil of night light changes in times of catastrophe

Natural disasters have large social and economic consequences. However, adequate economic and social data to study subnational economic effects of these negative shocks are typically difficult to obtain especially in low-income countries. For this reason, the use of night light data is becoming increasingly popular in studies which aim to estimate the impacts of natural disasters on local economic activity. However, it is often unclear what observed changes in night lights represent exactly. In this paper, we examine how changes in night light emissions following a severe hurricane relate with local population, employment, and income statistics. We do so for the case of Hurricane Katrina, which struck the coastline of Louisiana and Mississippi in August 2005. Hurricane Katrina is an excellent case for this purpose as it is one of the biggest hurricanes in recent history in terms of human and economic impacts, it made landfall in a country with high-quality sub-national socioeconomic data collection, and it is covered extensively in the academic literature. We find that overall night light changes reflect the general pattern of direct impacts of Katrina as well as indirect impacts and subsequent population and economic recovery. Our results suggest that change in light intensity is mostly reflective of changes in resident population and the total number of employed people within the affected area and less so but positively related to aggregate income and real GDP.</p

Can we nudge insurance demand by bundling natural disaster risks with other risks?

One question for policymakers is whether demand for natural disaster insurance is impacted by including coverage in a bundled policy alongside other perils, rather than as a separate policy. We examine this question with data collected among homeowners in the Netherlands and the United Kingdom (UK). Our findings show that demand is higher to insure separate risks than to cover all risks together in a bundled insurance policy in the UK, whereas no significant difference is found between demand for bundled vs. single policy insurance in the Netherlands. This difference in preference across the two countries is associated with whether individuals have been flooded, which is more often the case in the UK than the Netherlands. Based on the results we suggest implications for policymaking.<br/

Reflections on the current debate on how to link flood insurance and disaster risk reduction in the European Union

Flood insurance differs widely in scope and form across Europe. Against the backdrop of rising flood losses a debate about the role of EU policy in shaping the future of this compensation mechanism is led by policy makers and industry. In this paper we investigate if and how current EU policies influence flood insurance. While the question of supply and demand is at the core of the debate, we argue that another key dimension is often overlooked: how to use insurance as a lever for risk reduction and prevention efforts. We investigate if and how current EU policies interplay with these two dimensions and then reflect on the national policy level. We illustrate two conflicting cases of flood insurance: the United Kingdom (UK), where flood insurance provision is widely available, but subject to current reform, and the Netherlands, where efforts to introduce a broad flood insurance coverage have only recently failed. In analysing the current positions on the role of the EU in shaping flood insurance we conclude that there is wide agreement that a complete harmonisation of flood insurance offering across the EU is unlikely to be effective. We determine that there is clear scope for the EU to play a greater role in linking risk transfer and prevention, beyond existing channels, to ensure an integrated approach to flood risk management across the EU

Risk reduction in compulsory disaster insurance:Experimental evidence on moral hazard and financial incentives

In a world in which economic losses due to natural disasters are set to increase, it is essential to study risk reduction strategies, including individual homeowner investments in damage-reducing (mitigation) measures. In this lab experiment (N = 357), we investigated the effects of different financial incentives, probability levels, and deductibles on self-insurance investments in a natural disaster insurance market with compulsory coverage. In particular, we examined how these investments are jointly influenced by financial incentives, such as insurance, premium discounts, and mitigation loans. We also studied the influence of behavioral characteristics, including individual time and risk preferences. We found that investments increase when the expected value of the damage increases (i.e., higher deductibles, higher probabilities). Moral hazard is found in the high-probability (15%) scenarios, but not in the low-probability (3%) scenarios. This suggests that moral hazard is less of an issue in an insurance market where probabilities are low. Our results demonstrate that a premium discount can increase investment in damage-reduction, as can a policyholder‘s risk aversion, perceived efficacy of protective measures, and worry about flooding

After the virtual flood: Risk perceptions and flood preparedness after virtual reality risk communication

Many individuals experience problems understanding and preparing for low-probability/high-impact risk, like natural disasters and pandemics – unless they experience these events, yet then it is often too late to avoid damages. Individuals with recent disaster risk experience are, on average, better prepared. This seems to be mediated through emotions and a better understanding of the consequences. In this study, we use immersive virtual reality (VR) technology to examine whether a simulated disaster can stimulate people to invest in risk reducing measures in the context of flooding, which is one of the deadliest and most damaging natural disasters in the world. We investigate the possibility to boost risk perception, coping appraisal, negative emotions and damage-reducing behavior through a simulated flooding experience. We find that participants who experienced the virtual flood invest significantly more in the flood risk investment game than those in the control group. The investments in the VR treatment seem to decrease after four weeks but not significantly so

Perceptions of Catastrophic Climate Risks

Many climate change-related risks, such as more frequent and severe natural disasters, can be characterised as low-probability/high-consequence (LP/ HC) events. Perceptions of LP/HC risks are often associated with biases which hamper taking action to limit these risks, such as underestimation of risk, myopia, and the adoption of simplifed decision heuristics. This chapter discusses these biases and outlines key elements of policies to overcome them in order to enhance climate action

Clustering Dutch citizens into behavioural phenotypes to understand green energy investment preferences

People differ in their underlying economic preferences and needs for energy retrofits. Accelerating the energy transition, therefore, requires tailoring personalised solutions for distinct groups of individuals. In this paper, we create behavioural phenotypes of green energy investors in the residential sector of the Netherlands. Using a latent class analysis on a representative sample of 2245 respondents, we identify four distinct classes of investors: Comfort-driven Rationalists, Financially Driven Rationalists, Policy-driven Environmentalists, and Erratic Choosers. We innovate upon the literature by linking class profiling to economic preferences and behavioural biases, alongside socio-demographic and household characteristics. Our findings can help practitioners design bottom-up tailored behavioural interventions to accelerate the uptake of green energy investments