InsuranceFlood Risk Insurance: Voluntary or Mandatory?

15 December 2025, by Anna Priebe

Photo: AdobeStock/Christian

As extreme weather events become more frequent, the need for robust financial protection against natural disasters grows ever more urgent. Sophia Bock, part of the team led by Petra Steinorth, Professor of Risk Management and Insurance at the University of Hamburg Business School, is exploring whether regions hit by floods bounce back more quickly with a mandatory insurance system.

What lies at the heart of your research?

Europe has seen the emergence of a variety of flood insurance models. These span voluntary schemes, such as those in Germany, to mandatory systems like the one in France. In collaboration with colleagues from St. John’s University in New York, we are assessing which regulatory frameworks can best support and hasten economic recovery following floods across Europe.

How did you assess economic recovery?

Conventional measures like gross domestic product are hard to apply at the regional level. So we turned to satellite data on nighttime light intensity. The reasoning behind light data is straightforward: brighter areas signal greater economic activity – and the opposite holds true. We duly observed that flooded regions grow dimmer in the immediate aftermath. We then track how swiftly brightness returns to pre-flood levels. This approach enables highly detailed spatial analysis.

Do your results indicate that mandatory insurance aids swifter recovery?

Our examination of Europe’s 82 most severe floods in recent years reveals that a solidarity-based mandatory system enables affected areas to recover more rapidly from flooding. Notably, recovery proves markedly quicker than in regions relying on voluntary cover. This is probably due to insurance payouts becoming available more promptly, thereby accelerating rebuilding efforts. In the absence of cover, reliance falls on special funds or government aid, which often takes time to materialize. Mandatory schemes can ease the strain on public finances and limit the need for emergency relief.

The Ahr Valley disaster, in particular, reignited debate about mandatory insurance. What options are available today?

Germany presently has no universal mandatory cover for flood risks. Protection against natural hazards remains an optional add-on, with premiums heavily tied to risk levels. A solidarity-based mandatory approach, on the other hand, would ensure coverage for every household. Premiums could remain risk-adjusted but bolstered by solidarity mechanisms, such as government subsidies. This would help keep rates affordable even in high-risk zones.

At first glance, this makes mandatory insurance sound like the perfect answer. How ought we to interpret these findings?

Such a system clearly supports recovery in impacted areas. That said, each country must weigh its own unique context. For instance, if people come to expect ad-hoc government aid, it may weaken incentives both to insure and to take preventive steps. This is sometimes termed ‘charity hazard’, and it risks delaying recovery in the long run. That point lends particular weight to mandatory cover in vulnerable locations.

Yet, quicker recovery does not necessarily mean a mandatory system is the most cost-effective for society as a whole. High premiums, administrative overheads or redistribution effects may not always prove socially ideal. Careful consideration is essential.

Lastly, we must ask ourselves: Is rapid rebuilding in high-risk zones truly desirable?

Given your findings, how do you see public and political calls for mandatory insurance in Germany?

It is not a straightforward issue. What is plain is that far too many households still lack flood protection. I believe the key lies in developing a comprehensive strategy that bolsters private prevention incentives, heightens awareness of risks and, most importantly, closes existing coverage gaps. Our evidence demonstrates that regions with mandatory insurance rebound faster, returning more quickly to normal nighttime light levels. With this study, we offer solid empirical support for informed policy debate on lasting solutions.