Major insurers need to work on clearer flood definitions, and work with the Government to address the lack of flood insurance and affordability, the Institute of Actuaries of Australia has said in the wake of the recent Queensland flooding disaster.
Insurers often draw a distinction between different flood types (ie, riverine versus storm), which can elude consumers, according to Peter McCarthy, chairman of the Institute’s general insurance practice committee.
Complexities also arise when floods interact with other natural hazards. When flood damage occurs while rain is still falling it creates an overlap between flood and storm damage; and in the case of Cyclone Yasi, wind damage would likely be covered but river flooding from associated rains could not be.
A lack of adequate flood coverage and its prohibitive cost are key issues for flood-prone properties, according to the Institute. For example, a $500,000 property that floods every 30 years may require a flood premium in the tens of thousands of dollars, McCarthy said.
Any national solution must include an agreed policy and objective that states whether the goal is to fully or partially compensate those affected in the event of a flood, and to decide which properties will be covered to what limits, McCarthy said.
For example, McCarthy asked: Would there be compulsory cover? To what extent would private property, commercial property and government infrastructure be covered?
The Institute argued that there needed to be a realistic assessment about whether a solution is affordable in the long term; and it said the collection method (whether it was a tax, levy or premium), as well as the level of compulsion to contribute and amount required to reinstate damaged assets, could also limit options.
“To manage affordability, options must address the level of cross-subsidies from owners of properties that are not in flood-prone areas to owners of properties which are,” McCarthy said.
Governance and oversight is also important, including whose responsibility it will be to ensure property at risk is covered — whether it is individuals, the Government, or both. And any funding solution should also address what relief should be provided to those with no insurance or those who are underinsured, McCarthy said.
