The Need to Consider Flood Insurance As a Single Policy

Gideon Safo

Flooding is the most common and costly natural disaster in Ghana, causing loss of life and damaging properties as well as creating disruption to communities and business activities every raining season. Due to climate change and socioeconomic developments, the impact of flooding has been increasing in the last few decades. Unfortunately, many people living and trading in flood-prone areas do not have any insurance policy that covers their risk of flooding. A significant proportion of the Ghanaian population at risk of flooding is still not insured against such a peril.

Flood insurance is a single-peril flood policy that pays only for flood damage to an insured’s property up to the policy limit. Properties in high-risk zones sometimes require mortgaged homeowners to buy insurance to protect the structures, and if possible the contents. Renters can also purchase flood insurance policies to cover their personal and business properties.

In Ghana, there is no such policy as Flood Insurance. There is rather Assets All Risks insurance policy that sometimes extends to cover the risk of flooding. However, there are many different approaches to insurance in different countries around the world where private flood insurance cover is available. Such different approaches can be categorised into two basic types called the ‘option’ system and the ‘bundle’ system. (Crichton D. 1998).


The Option System

Under this system, insurers agree to extend their policy to include flood on payment of an additional premium. Nevertheless, there are a number of problems with optional cover. Apart from the problems of defining what ‘a flood’ means so it can be excluded, the biggest problem is adverse selection. Adverse selection means that insurers tend to select against customers by only making the cover available in areas they consider to be safe, while customers select against insurers by only buying it in areas they deem to be risky.

The result is that cover, when it is available at all, is expensive and has very low market penetration. In Ghana, where government always steps-in through the National Disaster Management Organisation (NADMO) to compensate flood victims, the effective demand or penetration for such insurance policy will be low.


The Bundle System

In this system, cover for flood is only available if it is ‘bundled’ with other perils – such as fire, storm, theft, earthquake etc. With the bundle system, insurers have the freedom to charge differential rates, but excessive rate increases can be mitigated because the risk is not only spread over time, but across perils, and across rating areas.

People living in areas safe from flood still have to buy flood cover if they want to get cover for earthquake, fire and burglary among others. This system is characterised by much higher market penetration. A good example can be the Assets-All-Risks insurance policy. Everyone who buys such an insurance policy can pay for the risk of flooding whether they think they need it or not. This reduces the opportunities for adverse selection by customers and insurers as well.

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Risk reduction

From a socioeconomic perspective, insurance offers a more effective way of addressing the cost of disasters than relying on governmental post-disaster assistance. It is certainly about post-disaster support, and it can also reduce immediate welfare losses and consumption reduction. Insurance can send a signal to encourage more risk reduction and prevention such as flood-proofing of building and property, as well as local and national flood protection measures. Flooding occurs regularly every year, and a few inches of flooding can cause millions of cedis damage. Flooding of a business can result in devastating financial loss and even closure.


State involvement

Naturally, many Ghanaians, if left alone, will not take insurance cover. Some have lost confidence due to bad claim experiences. Nevertheless, it would be prudent for government to enact laws and policies which make people take out cover against the risk of flooding, especially in flood-prone zones. In 1968, the US Congress passed the National Flood Insurance Act (NFIA) that also gave birth to the National Flood Insurance Program (NFIP).

The NFIP was designed to stem the rising cost of taxpayer-funded relief for flood victims and the increasing amount of damage caused by flood. More than 20,000 communities across the country participated in the programme. Until 1973, the purchase of flood insurance was voluntary, with only about one million policies in force. But the 1973 amendment put constraints on the use of federal funds in high-risk floodplains – a measure that was expected to lead to almost universal flood coverage in those zones. In 1994, the enforcement was tightened. Banks which gave out loans without enforcing the law were fined. People who had been flooded before but failed to purchase flood insurance after their first flood were denied federal flood disaster aid.

This is a policy the government of Ghana can consider. It might be difficult to implement because the majority of people living in flood-prone zones are poor, and also due to political reasons. But once this policy is adopted and implemented in Ghana, the cost of flooding on government’s purse will reduce, because the insurance companies will take measures that will mitigate flooding.

People who fail to purchase the flood insurance policy after their first flood can be denied government flood disaster assistance. This will compel people living in flood-prone areas to purchase the policy, and also increase the demand and penetration of Flood Insurance Policy in Ghana.

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Other countries

In France, the CATNAT system has been running since 1982 – under which government acts as a reinsurer. There is also the Bernier Fund that provides loss-reduction incentives. The CATNAT scheme is offered through private intermediaries and funded through a flat rate surcharge that is 12% on building and contents insurance, over existent policies against loss and damage caused by flooding.

In the United Kingdom, the Flood Re policy was launched in April 4, 2016 between the government and insurance companies. It is a pool system that provides flood insurance coverage to domestic properties deemed at significant risk of flooding. It is not Home Insurance. Instead, it works behind the scenes with existing insurance companies. Flood Re helps insurers offer more affordable flood insurance to those in areas at risk of flooding.

With these examples, Ghana government – in collaboration with private insurance companies – can provide this kind of policy wherein government will be a reinsurer. The policy should be mandatory. Individuals and organisations which fail to purchase the Flood Insurance Policy after their first flooding should not be given flood disaster assistance. People who build in flood-prone areas should be allowed to pay a higher rate of premiums. This will compel Ghanaians to take responsibility for themselves, especially those who build houses and structures near water-bodies.



Flooding is a natural process – and it can happen at any time in a wide variety of locations across the country. Flooding will continue to wreak havoc if we don’t find innovative ways to deal with it. It may be difficult to determine where will get flooded, but the pattern of previous floods give enough clue. Insurance is one of the most important mechanisms for financing catastrophic losses due to flooding, and individuals and institutions which actively manage their catastrophic exposures generally turn directly to the insurance markets when they have implemented loss control measures.

Insurance has inherent qualities that promise to reduce future risks and provide compensation if a loss occurs due to flooding. The idea of having some form of protection and indemnification for losses incurred in business can result in entities seeking to pursue objectives, albeit risky, confident that insurance can assist in the event of an unfortunate incident.

It is high time government considered this type of policy initiative against this annual flood ritual. Effective collaboration between insurers and government should not be seen as a cost, but as an investment to secure future insurability through flood resilience.

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Place of work: Tri-Star Insurance Services Gh. Ltd.

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