The Benefits of Uniform Flood Insurance

Prevention policies against flood, such as dams or levees, are commonly designed by local jurisdictions and for most, they exert externalities on neighbouring jurisdictions. We study a model in which each jurisdiction chooses its collective prevention effort depending on the flood risk and on the insurance system that covers its inhabitants. As compulsory uniform insurance depends on all insureds' risk, it enables partial integration of prevention externalities by jurisdictions. We determine under which conditions compulsory uniform insurance Pareto dominates risk-rated insurance.