TACKLING THE CHALLENGE OF FLOOD INSURANCE - AN AUSTRALIAN
COMMUNITY PERSPECTIVE

The situation

The lack of affordable and consistent flood insurance is one of the biggest issues facing Australian communities. It's a challenge that we have begun tackling but it is one that is fraught with complexity. Although the issue poses a significant reputation risk to insurers, we believe it is a whole-of-society issue affecting local communities, governments and insurers.

In the past, flood insurance has not been provided for one simple reason - insurers have not been able to determine the flood risk to individual homes. Understanding this risk is essential to be able to set a premium.

Unlike car insurance, where risk can be determined by such factors as car make and model, there is no commonly collected information for properties that can help insurers assess risk. Each home's risk is determined by its individual location relative to a flood plain. Until recently, data technology was not available to cost-effectively develop flood risk models.

Although Australia has been in the grip of drought for some time, the significance of this issue will be painfully clear come the next wet period.

The considerations

The annual cost of insuring a home against flood would vary significantly depending on its location - from virtually nil to thousands of dollars.

There is no cover for all types of flood because of difficulty in providing affordable premiums when the risk of flood is known to be high - there comes a point where enough premium simply could not be charged to cover the cost of claims without being prohibitively expensive, forcing up the cost of insurance for all other customers.

Our most recent assessment puts 160,000 Australian homes at risk of a one-in-100 year flood. Some homes lie in places where the flood frequency could be higher than one-in-20 years. We have concerns over the fact that approval was given for the construction of these homes in the first place. However, as they now exist, community-minded insurers such as ourselves, must look to how to provide affordable flood cover to their residents.

The way forward

We believe this issue must be resolved. Other countries around the world have found schemes to address difficulties in pricing flood cover. In some cases, the mechanism used to offer protection to families living on flood plains has been cross-subsidised coverage.

It's our belief that a solution is needed which allows premiums to vary according to flood risk, but provides some subsidy on the premium for those householders whose risk is so high that risk-rated flood cover would be unaffordable.

Improvements in the mapping of flood risk and incentives for local government to reduce the number of homes at risk of flooding are steps towards achieving this solution.

We're hoping to draw the spotlight on this issue through our involvement in the Insurance Council of Australia and through our CEO's current position as its President.

It is a challenge for members of the public, governments and insurers to publicly debate these issues and address policy implications for town planning, mitigation works and insurance premium pricing into the future.