Behavioral insights into the causes of underinsurance against flood risks: Experimental evidence from the Netherlands

Abstract

The Netherlands is protected from flooding by a complex system of flood protection infrastructure. Although these defenses are highly regarded, they are an incomplete protection, i.e., residual flood risk remains. In light of residual flood risk and potential climate change impacts, which may increase the risk of flooding in the future, there is room for homeowner-level measures for limiting risk, like flood insurance. However, it has been frequently shown that some individuals fail to insure flood risks, while others have a sufficiently high demand for flood coverage. This chapter discusses recent evidence about flood insurance demand in the Netherlands, and gives insights into reasons for underinsurance related to systematic decision biases, difficulties in processing low flood probabilities, and the crowding out effect on demand of compensation from the government for flood damages (charity hazard). Moreover, we offer solutions for stimulating flood insurance demand informed by behavioral economic theory and choice architecture. We indicate which of these solutions has the potential to improve disaster preparedness in other regions like Texas in the United States, as well as solutions that are specific to the Dutch case.