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By Terry McMullan

As Treasury officers begin working out the details of a reinsurance pool to deal with the affordability and availability issues surrounding property insurance in northern Australia, it’s worth taking a look at some of the schemes operating elsewhere in the world.

Let’s start with the French nat cat reinsurance scheme, the Caisse Centrale de Réassurance (CCR), which is a partnership between insurers and the state.

France is one of the very few countries with a system that guarantees all its citizens, its businesses and its territorial municipalities adequate compensation at affordable rates.

CCR was formed in 1982 after the French Government recognised the economic consequences of low insurance levels against natural disasters.

It provides insurers with unlimited state-guaranteed reinsurance coverage against a wide range of natural catastrophes arising in France and its overseas territories.

AM Best says CCR “improves the consistent resilience” of French insurers by providing an unlimited state guarantee, while at the same time protecting the insurance market from the sort of performance and balance sheet volatility inherent in peak exposures.

So how does the French nat cat scheme work? It’s quite simple. It takes a compulsory 12% of property insurance premiums and 6% of fire and theft premiums for vehicles from a total of about 90 million policies, giving it last year a gross premium income of around €1 billion and a profit of €90 million.

For insurers, the CCR deal provides a 50% quota share after any listed natural disaster. CCR says it can support a €4.5 billion event without triggering the state guarantee.

Meanwhile, the United Kingdom has Flood Re, which was launched in 2016 to provide cover for the 2% of British homes most exposed to flood risks. That’s about 250,000 homes, although critics say a more accurate figure would be 370,000.

In 2000 serious floods affected 10,000 British properties and caused £1 billion in damage. As a result the UK Government and the Association of British Insurers drew up a “statement of principles” under which the Government agreed to keep investing in mitigation projects and the insurers agreed to keep insuring at-risk properties at existing rates. This was financed by a levy on all home insurance premiums.

But then new entrants to the home insurance market, who weren’t bound by the agreement, undercut the prices of the insurers who were.

After much debate and various changes to the statement of principles – and a call for a government-underwritten reinsurance scheme for high-risk homes – the insurers bit the bullet and launched Flood Re in 2016. It’s a non-profit organisation which caps domestic flood insurance premiums and is managed and paid for by the insurers. All home insurers have to belong to the scheme, with the levy raising about £180 million a year.

To avoid Flood Re encouraging people to build in flood-prone areas, houses built since 2009 are not covered by the scheme. The Government has committed to providing any necessary relief resources if the UK is hit by a 1-in-200 year flood.

Flood Re is expected to be in place for 25 years before transitioning back to the free market, which gives the Government and local councils time to build sufficient flood control measures and reduce high-risk properties’ exposures to flood.

Critics say the scheme was drawn up without consideration for the consequences of climate change, which is expected to increase the number of flood risks over the years. Only time will tell.

We turn now to the United States, where The National Flood Insurance Program (NFIP) – a program that eats money – was created in 1968 to make it possible for people living and working in flood-prone areas to buy flood insurance.

The NFIP’s availability is limited to communities that adopt “adequate land use and control measures with effective enforcement provisions to reduce flood damage by restricting development in areas exposed to flooding”.

While it was intended to provide an insurance alternative to disaster assistance, it hasn’t really worked out that way.

The NFIP insures some 5.5 million homes, mostly in hurricane-prone Texas and Florida. Its costs were fully covered by its premiums until 2004.

But then came major hurricanes like Katrina, which hit New Orleans in 2005, killing 1800 people and causing $US125 billion in damage, and Hurricane Sandy in 2012 (estimated damage cost: $US25 billion). The resulting floods saw the NFIP slip to $US25 billion in debt, and it hasn’t recovered since.

While the US Congress cancelled $US16 billion of the debt in 2017, today it owes the US Treasury $US20.525 billion.

Critics say the NFIP is compromised, because owners of property in floodplains frequently receive disaster aid as well as payment for their insured losses.

And a group called Taxpayers For Common Sense has pointed out that “properties which flooded 17 or 18 times are still covered under the federal insurance program” without premiums going up.

The Federal Emergency Management Agency, which administers the NFIP, also outsources many policies to private insurers, paying claims directly to them with “little oversight and few rules”.

This is one model you have to hope won’t get any traction in Canberra. For the French and UK models, there are some attractive features that deserve consideration.