What Explains Variation in National Flood Insurance in the U.S. and Germany?

• In Event: Housing and American Political Development

Abstract

Despite its reputation as a liberal welfare and capitalist model, the U.S. has adopted one of the most sizable national flood insurance programs in the world, providing affordable flood insurance to property owners in high-risk areas. Germany, a social market economy home to the quintessential Bismarckian social insurance model, is exposed to even higher flood risks than the U.S. but has not adopted a similar insurance program and instead relied on covering flood damages through ad hoc payments after flood disasters. Why? This paper investigates this divergence through a comparative, historical study of key historical junctures that set the U.S. and Germany on different policy paths, including the U.S. National Flood Insurance Act of 1968 and its subsequent reforms as well as failed German policy attempts. It argues that the U.S. scheme is best interpreted as a program securing the financial and real estate industry's interest to support property values in risky homeownership areas (and thereby protect the housing wealth of homeowners) as well as to craft a new national market for the U.S. insurance industry operating in an otherwise fragmented and state-based regulatory environment. In Germany, several attempts to adopt a similar national flood insurance program stalled, because flood-affected regions were not able to convince non-affected regions and national policymakers to share and cross-subsidize risks between regions. Moreover, German insurance industries opposed national legislations that would result in "inflationary" insurance premiums for owners (and higher rents for tenants), interfere with contractual freedom, and foster moral hazard of building homes in high-risk areas. The paper contributes to the literature on the public-private welfare state and the financialization of housing by adding the environment as a fundamental component of understanding financial risk and social welfare in times of climate change and increasing occurrences of extreme weather events.

Authors

• Alexander Reisenbichler, University of Toronto

• Sebastian Kohl