Disaster Loss Financing in Germany - The Case of the Elbe River Floods 2002

Mechler, R. ORCID: https://orcid.org/0000-0003-2239-1578 & Weichselgartner, J. (2003). Disaster Loss Financing in Germany - The Case of the Elbe River Floods 2002. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-03-021

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Abstract

In August 2002, floods in central Europe caused damage of about Euro 15 billion; insured losses were about Euro 3.1 billion. According to Munich Reinsurance, this was the most expensive natural disaster of the year 2002. In Germany, heavy rains led to some of the worst flooding the Free State of Saxony has witnessed in more than a century. In Dresden, the Elbe River rose from a normal summer level of about two meters to 9.13 meters surpassing the historical flood mark of 8.77 meters seen in March 1845, to reach on August 17, 2002, a water level of 9.40 meters -- the highest level that has ever been recorded in Dresden.

Shortly after the flood event, overall damage in Germany was estimated to be Euro 22 billion, which in December 2002 was revised to about Euro 9.1 billion of direct losses. Concerning the regional distribution of losses, Saxony was hit hardest. With direct damage of Euro 6.084 billion the federal state bears 67% of the total losses. About 14.9% (Euro 1.353 billion) of the overall damage is corresponding to the German government and 11.3% (Euro 1.029 billion) to the state of Saxony-Anhalt.

The major share of about Euro 3.316 billion accrued to state and municipal infrastructure (36.6%), federal infrastructure losses were Euro 1.353 billion (14.9%); private households suffered about Euro 2.547 billion of losses (28.1%), followed by private companies with Euro 1.438 billion (15.9%).

The compensation of the flood losses was mainly financed by a special disaster relief and reconstruction fund set up by both the National Government and the federal states of Germany. This so-called "Sonderfonds Aufbauhilfe" amounted to Euro 7.1 billion, or seventy-eight percent of total direct losses. Other sources of financing were the insurance (estimated to amount to Euro 1.8 billion), an European Union emergency fund (Euro 444 million), and public donations (Euro 243 million). Total financing available amounting to 9.6 billion Euro thus exceeds the direct losses incurred, which will only be financed.

Considering that government compensation will be provided in terms of replacement costs rather than current value lost, still all direct losses could be compensated in theory. Compared to total compensation provided in other major events in developed countries, which on average amounted to 45% of total losses, this large financing provided is exceptional. This can be attributed to the following factors: the floods constituted the largest losses ever in Germany and were commonly considered an event with a return period of less than 1000 years ("Jahrtausendhochwasser", millennium floods); the floods mainly affected East Germany that is still struggling economically and where unemployment is high; some observers cite the "hot" election phase as federal elections were in their final stages of what was known to be a very close election.

The provision of government funds to the affected private households and companies and municipalities was and is governed by a set of principles that were explicitly set out by the government in order to guarantee the efficient allocation of the funds, allow quick reconstruction and provide and keep incentives for ex-ante measures. These principles include: subsidiarity (the delegation of responsibilities to the lowest administrative level feasible), parallelity (reconstruction in the affected East German region was and is parallel and independent of "Aufbau Ost" (reconstruction in East Germany after reunification), provision of Incentives (inclusion of deductibles in order to maintain incentives for mitigation and insurance), efficiency (financing of direct losses only to primarily compensate those worst affected), and the ability to rebuild (loss financing was provided in terms of reconstruction costs rather than current values).

Regarding financing on the municipal level, the Saxon cities of Dresden and Pirna were examined since both experienced large damages to their infrastructure and public assets: Dresden Euro 400 million, equaling forty-seven percent of the municipal budget of 2002, and Pirna Euro 22 million, or thirty-five percent as a fraction of the budget. The cities expect to be reimbursed ninety percent of their damages in the currently ongoing financing negotiations. Also, large losses were suffered by the private households and business, however, these will not be compensated by the local governments but by the "Sonderfonds Aufbauhilfe." Households can expect to receive eighty percent of their losses, businesses up to seventy-five percent.

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