FLOOD POLICY RESPONSE MUST GO BEYOND INSURANCE

The destruction caused by the major flood events around Australia during January and February provided us all with a stark reminder of the crucial role insurance plays in economic recovery.

And the debate which has followed is providing us with a once in a generation opportunity – to build a sustainable, community-wide solution to the issue of flood risk.

Arriving at this solution, in my view, means leveraging the benefits of a private insurance market, supporting households at high risk of flood, ensuring the community has as much information as possible on their risk and, crucially, mitigating risk through infrastructure and planning.

But while the debate has inherent opportunities, it also brings the danger of over-regulation and an unwieldy bureaucracy.

In particular, the suggestion that insurers should be compelled to offer mandatory flood cover has the potential to reduce competition.

In any case, compulsion is unnecessary. Competition within the private insurance market has driven a significant increase in the number of policies offering flood cover, from 3% five years ago to 54% now, and this figure could reach over 80% in the next 18 months, according to industry figures.

IAG companies will be contributing to this increase. NRMA Insurance, CGU Insurance, SGIC and SGIO aim to offer flood cover as a standard inclusion in home and contents policies during 2012, as more data becomes available.

This addresses the community’s need for greater clarity, and is also based on our experience in NSW, where NRMA Insurance provides flood cover automatically to 98% of its customers. The remaining 2%, who are at high risk, have the option to ‘opt out’, and most do. Effectively this means that those who need flood cover the most, choose not to take it.

Since late last year, our access to data on flood risk has improved. However, a sustainable response to flood requires further increasing our knowledge of risk. This relies on national flood mapping data which should be made broadly available to insurers and anyone else who wants to understand the risk of flood, particularly those households in high risk areas.

These households, which are likely to find flood cover unaffordable, need to be at the centre of any reform of our approach to flood.

Some people have suggested a national pool, potentially funded by a levy on insurance premiums, however this could unfairly increase the cost of living for those with low risks as they cross-subsidise the extreme risks. It would also do nothing to discourage ongoing development in dangerous, flood-prone areas.

A subsidy for insurance cover for high risk homes is a better solution, if it’s implemented in a way which encourages investment in mitigation. Under this model, insurers would charge the appropriate premium (agreed with government) and government would “top up” the policyholder’s payment. This would ideally be recovered in a manner that encourages local and state governments to conduct mitigation works to reduce the ongoing subsidies in their jurisdictions.

We also support a single, standard definition for flood in home and contents policies, and simpler policy statements. We recognise the industry needs to be extremely clear with policyholders on which risks are and are not covered, and we are working as part of the industry to provide this clarity.

Of course, the insurance industry alone cannot prevent that risk from becoming reality, so the government’s policy response to recent natural perils must go beyond insurance, with a broader approach involving all levels of government boosting their investment in mitigation infrastructure and higher quality planning and zoning standards, as well as building standards which reflect the prevailing risk.

Mitigating flood risk, and responding to it when it does occur, has been an issue which has challenged Australians for generations. With an appropriately calibrated response, future generations have a better chance of dealing with flood constructively.

An edited version of this opinion piece by IAG CEO, Mike Wilkins, appeared in The Australian on 15 July 2011