Damage assessments of natural hazards supply crucial information to decision support and policy development in the fields of natural hazard management and adaptation planning to climate change. Specifically, the estimation of economic flood damage is gaining greater importance as flood risk management is becoming the dominant approach of flood control policies throughout Europe. This paper reviews the state-of-the-art and identifies research directions of economic flood damage assessment. Despite the fact that considerable research effort has been spent and progress has been made on damage data collection, data analysis and model development in recent years, there still seems to be a mismatch between the relevance of damage assessments and the quality of the available models and datasets. Often, simple approaches are used, mainly due to limitations in available data and knowledge on damage mechanisms. The results of damage assessments depend on many assumptions, e.g. the selection of spatial and temporal boundaries, and there are many pitfalls in economic evaluation, e.g. the choice between replacement costs or depreciated values. Much larger efforts are required for empirical and synthetic data collection and for providing consistent, reliable data to scientists and practitioners. A major shortcoming of damage modelling is that model validation is scarcely performed. Uncertainty analyses and thorough scrutiny of model inputs and assumptions should be mandatory for each damage model development and application, respectively. In our view, flood risk assessments are often not well balanced. Much more attention is given to the hazard assessment part, whereas damage assessment is treated as some kind of appendix within the risk analysis. Advances in flood damage assessment could trigger subsequent methodological improvements in other natural hazard areas with comparable time-space properties.

Efficiently reducing natural hazard risks requires a thorough understanding of the costs of natural hazards. Current methods to assess these costs employ a variety of terminologies and approaches for different types of natural hazards and different impacted sectors. This may impede efforts to ascertain comprehensive and comparable cost figures. In order to strengthen the role of cost assessments in the development of integrated natural hazard management, a review of existing cost assessment approaches was undertaken. This review considers droughts, floods, coastal and Alpine hazards, and examines different cost types, namely direct tangible damages, losses due to business interruption, indirect damages, intangible effects, and the costs of risk mitigation. This paper provides an overview of the state-of-the-art cost assessment approaches and discusses key knowledge gaps. It shows that the application of cost assessments in practice is often incomplete and biased, as direct costs receive a relatively large amount of attention, while intangible and indirect effects are rarely considered. Furthermore, all parts of cost assessment entail considerable uncertainties due to insufficient or highly aggregated data sources, along with a lack of knowledge about the processes leading to damage and thus the appropriate models required. Recommendations are provided on how to reduce or handle these uncertainties by improving data sources and cost assessment methods. Further recommendations address how risk dynamics due to climate and socio-economic change can be better considered, how costs are distributed and risks transferred, and in what ways cost assessment can function as part of decision support.

Flood damage is on the increase due to a combination of growing vulnerability and a changing climate. This trend can be mitigated only through significantly improved flood risk management which, alongside the efforts of public authorities, will include improvements in the mitigation measures adopted by private households. Economically "reasonable" efforts to self-insure and self-protect should be expected from households before the government steps in with publicly-funded relief programmes. To gain a deeper understanding of the benefits of households' precautionary measures, telephone interviews with private home owners were conducted in the Elbe and Danube catchments in Germany after the floods of 2002 and again after the floods in 2005 and 2006. Only detached, solid single-family houses were included in this study, which is based on 759 interviews. In addition, market-based cost assessments were solicited based on a "model building". Expert interviews and a literature review – including catalogues and price lists for building materials and household appliances – were used as back-up information for the cost assessments. The comparison of costs and benefits shows that large investments, such as building a sealed cellar, are only economically efficient if the building is flooded very frequently, that is, if it is located in a high flood risk area. In such areas it would be preferable in economic terms not to build a new house at all – or else to build a house without a cellar. Small investments, however, such as oil tank protection, can prevent serious damage at low cost. Such investments are still profitable even if the building is flooded every 50 years or less on average. It could be argued that these low-cost measures should be made mandatory through the enforcement of building codes. Financial incentives built into insurance contracts coupled with limits set on governmental relief programmes would provide an economic motivation for people to invest in precautionary measures.