The German flood disaster of summer 2002 highlighted a dilemma concerning insurance against damages caused by natural forces. The area of Dresden was the most visible example. On the one hand, owing to the rising incidence of natural disasters, private insurance companies are increasingly withdrawing coverage of floods. On the other, the availability of emergency relief funded by the state and private donations in case of a natural catastrophe are systematically weakening the incentive for potential private victims to implement prev ntive measures so as to reduce the risk of damages. And local authorities also believe that the government will cover the cost of repairs and adjust their efforts towards risk prevention. The dilemma is further exacerbated by the evident overestimation of the extent of damages in the immediate aftermath of natural disasters, resulting in unnecessary withdrawal of private purchasing power and an ad hoc reprogramming of public investment.
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