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A solution for flood insurance? Only time will tell if the Natural Disaster Insurance Review’s plan will survive the negotiations By Terry McMullan
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IMAGINE A NATION WHERE FLOOD DAMAGE TO homes is paid for by insurers who have accurate data to price flood risks, while a government agency handles discounted premiums for high-risk properties and pays claims through a reinsurance facility. That’s part of the picture drawn by the report of the Federal Government’s Natural Disaster Insurance Review (NDIR), which suggests a complete solution to Australia’s confused and contentious flood insurance. The plan involves insurers and the Federal Government sharing some risks, with government money being used to make insurance affordable for the estimated 7% of homes in flood risk zones. For flood-affected rural residents in several states, and the citizens of Brisbane, it must sound too good to be true. And it will be six months at least before we know if that’s all it is. It’s the first of four official reports related to the industry and last summer’s floods, and the one most likely to do some good. The NDIR’s final report, released last month, tackles the two major issues surrounding universal flood cover – affordability and availability. The review panel, which was formed in March by Assistant Treasurer Bill Shorten, presented 47 recommendations to the Government, which has greeted the basic plan relatively positively. The panel – Chairman John Trowbridge, Jim Minto, the Managing Director of life insurer TAL, and leading plaintiff lawyer John Berrill – has charted a way through the flood insurance mess and borrowed from some of the best features of foreign flood insurance schemes while adding a few unique touches. Their report makes the point that of the 6.6 million or so houses in Australia and around 1-2 million other types of dwellings, as few as 7% are subject to flood risk. The strategy outlined by the panel in its final report to the Government is underpinned by five essential requirements: 1. All home insurance, home contents insurance and body corporate insurance products need to include flood cover. insuranceNEWS
2. Discounted insurance premiums are needed for homes, home contents and home units in areas of medium and high flood risk, so as to render flood insurance affordable. 3. National co-ordination of flood risk measurement and mitigation is needed, in order to improve flood risk management for the benefit of the community generally and to ensure the continuing development of a competitive market for flood insurance. 4. A mechanism is needed to fund the discounts that are to be offered for affordability purposes. 5. Insurers will need access to a governmentsponsored reinsurance facility if they are to deliver flood insurance discounts without compromising their own commercial positions. As the panellists note, when designing a set of arrangements to meet these five requirements it was important “not to create perverse outcomes that encourage further residential development in areas subject to flood risk”. Their 47 recommendations rely on the Government accepting four which they regard as “pivotal”. • They want the Government to “sponsor” an agency to oversee the national co-ordination of flood risk management and operate a system of premium discounts and a flood risk reinsurance facility, supported by a government funding guarantee; • To ensure availability, all home insurance, home contents and home unit insurance policies would automatically include flood cover; • To ensure affordability, a system of premium discounts would have to be introduced so policyholders in flood risk areas would be eligible for discounts against the full cost of flood insurance; and • The Government would guarantee the payment of claims by covering any funding shortfall in the reinsurance facility. While it has not yet committed to the agency concept, and has put discussion of the “pivotal” submissions on hold until next year, the Government has already responded to the immediate need for consistent national flood data. It has agreed to spend $12 million between next
December 2011/January 2012