Flood Insurance, Disaster Aid, and Economic Recovery in Europe

The paper presented in this ZEW Reasearch Seminar investigates the role of insurance regimes and disaster aid programs in recovery dynamics after flooding events in Europe from January 2014 to September 2023, covering 107 floods. The authors measure economic activity utilizing night lights data and find significant reductions in economic activity for four months after a major flooding event. Investigating economic recovery, they find evidence that economic recovery is faster under a flood insurance mandate for private property. they observe the highest reductions in night light intensity in the first four months after a flood in regions with an indirect mandate. Government aid crowds out insurance, indicating charity hazard. This interaction (partly) offsets the positive direct effect of insurance penetration on night light activity within the first four months after a flooding event. The findings highlight the effectiveness of a mandatory holistic approach for mitigating flooding risk and offering financial protection particularly in flood prone regions.