In its submission to the Natural Disaster Insurance Review (NDIR), the Insurance Council of Australia (ICA) presents a strong, politically compelling case that mandatory flood cover is not the way forward. But its alternative solution to providing affordable cover for the 2% of properties at extreme and high flood risk also comes with some risks of its own.

The council’s plan for rebates similar in form to the First Home Owner Grant to be provided to those properties that face a significant flood risk is not in itself the problem. It’s the funding mechanism it proposes which looks incapable of gaining support.

ICA suggests that the rebates, as well as mitigation works that will minimise the number of at-risk properties, should be funded out of the $4.6 billion the state governments collect annually in stamp duty on insurance premiums.

“While the use of stamp duty revenue for this type of activity is a form of cross-subsidisation by government, the relinquishment of revenue would serve as a powerful motivation to carry out mitigation, to reduce the risks and to gradually reduce the extent of subsidisation required,” ICA’s submission says.

CEO Rob Whelan says that “all it takes is the political will to address the real problem”.

He's right of course, although lack of political will in the past is what got us all into this mess in the first place. He reveals there have been no backroom discussions with state governments to garner support for the proposal.

So for all the sheer common sense in ICA’s idea, it is a political non-starter – a fact which the industry should know all too well.

Getting the states to agree to united action on anything to do with revenue is well nigh impossible – not least when several are now governed by the party which is in opposition at a federal level, and especially when it involves them parting with money.

The fight to abolish insurance premium taxes has been a good teacher. The fire services levy issue alone has raged for more than 20 years and while most states eventually gave way for many different reasons, even now NSW remains resistant to any move to an equitable funding system. A piecemeal flood cover solution would be no solution at all.

ICA’s submission is strong on pushing two political buttons: the potential for a compulsory scheme to increase levels of underinsurance or non-insurance, and the rising cost imposed on Australians by compulsion.

As an alternative to the state government funding option, ICA suggests the states could “apportion recoveries of the subsidies to local governments who have flood risks and who are not actively mitigating”. But surely this impost would, in time, be charged back to ratepayers anyway?

The council does not mince words in its description of the review process or of the NDIR issues paper, which it describes as taking “a relatively narrow approach” with “fundamental failings” which pay “little regard” to the drivers of the flood hazard in Australia.

It says that because of the NDIR panel’s “strong preference” for creating a government flood insurance pool, the NDIR process “is not capable of a proper examination of the economic consequences of flood pool options”.

So in the event of ICA’s failing to convince the states to fund the gap or shove the burden on to local governments, what’s Plan B?

The council says that if the Federal Government insists on establishing a flood insurance pool, the Productivity Commission should first “conduct a full impact study and costing of the various options, as well as the key risks and benefits”.

It is banking on the boffins to point out the potential in the pool plan for increased costs and reduced competition, which it foreshadows with suggestions that insurers may “redline” flood-prone areas by not offering any cover in those communities, and that smaller insurers could pull out of the home insurance market altogether.

Mr Whelan says ICA is “committed to working with governments at all levels to ensure they have the relevant information to consider our recommendations” and will “lobby hard” for its position. Going into battle with a solution the politicians don’t want, ICA will need to lobby very hard indeed.