Making flood insurance compulsory or coming up with a common definition of flood will not necessarily mean that insurers will offer it – nor will it make insurance more affordable, according to chair of the Institute of Actuaries of Australia’s (IAA’s) general insurance practice committee, Peter McCarthy.
McCarthy said the issues around flood cover were very complex, and no silver bullet was going to address them. He said from an insurer’s perspective, even if steps were made by Government to make flood cover compulsory, it came down to a commercial decision. McCarthy noted that not all insurers offered flood cover, and if they did so it would obviously affect the cost of premiums.
“If insurers are going to offer flood cover, they would have to charge an additional premium for it,” he said, adding that the level of the premium would depend on how vulnerable the property in question was to flooding.
“A common definition of flood is just one step in a process that needs to be undertaken to be able to offer flood cover.”
Even if more insurers entered the market, people whose properties were prone to floods may find the premiums unaffordable, said McCarthy.
“That’s a big issue in trying to get people covered for flood,” he said. “Having a definition of flood is fine, and it’s an important step, but that doesn’t actually mean that insurers can or want to offer flood cover.”
McCarthy said compulsory flood cover was a highly emotional subject and entailed tricky social policy issues. The IAA recently conducted a Natural Disaster Insurance Survey of 420 actuaries, which found that 55 per cent were against making flood insurance compulsory. Their standpoint was that those at low risk would effectively be subsidising the high-risk households, discouraging individual responsibility. The majority of respondents supported the existing risk-rated model for property insurance, while 73 per cent rejected community ratings for flood insurance and 53 per cent rejected premiums being subsidised for high-risk policy holders. McCarthy said the survey revealed very disparate views on the issue among an informed subset of the community, which was evidence of its complexity.
The Australian Direct Property Investment Association (ADPIA) and GSA Insurance Brokers noted that the underinsurance issue did not only affect homeowners but also commercial property managers.
“Although the Government is now moving to standardise policy definitions, it is doubtful that any such standardisation could be introduced to ensure all commercial property managers are adequately covered,” said GSA chief executive, Paul Hines. He said despite changing business models the funds management industry had noted a reluctance among insurers to amend or broaden their product.
