The political economy of natural disaster insurance : lessons from the failure of a proposed compulsory insurance scheme in Germany

This paper studies the politico-economic reasons for the refusal of a proposed compulsory flood insurance scheme in Germany. It provides the rationale for such scheme and outlines the basic features of a market-orientated design. The main reasons for the political down-turn of this proposal were the (mis)perceived costs of a state guarantee, legal objections against a compulsory insurance, distributional conflicts between the federal government and the German states (Länder) on the implied administrative costs, and the well-known "charity hazard" of ad-hoc disaster relief. The focus on pure market solutions proved to be an ineffective strategy for policy advice in this field.