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20 June 2013
The Federal Government has given its strongest signal yet that it will not pursue the introduction of opt-out flood insurance with its announcement of a range of soft measures aimed at making flood insurance simpler and more effective following the floods of 2010/11.
The measures include the publication of flood uptake statistics and the National Insurance Brokers Association’s new toll-free Need a Broker number and website enhancements, along with the recently announced implementation of the standard flood definition, the ongoing work on key facts sheets and the industry’s own changes to the General Insurance Code of Practice. All are targeted at increasing levels of flood cover in the community.
The Government’s response to the House of Representatives Standing Committee investigations into the operation of the insurance industry during disaster events and recent increases in residential title premiums in North Queensland is, for the most part, low-key. The political fire and brimstone so evident a year ago has been replaced with sober assessments and limited reactions.
But a footnote to Financial Services Minister Bill Shorten’s announcement of the response gives the biggest hint on the future direction of flood insurance policy in Australia.
Mr Shorten reveals that the Government will defer a final decision on its proposal that all insurers must offer flood insurance in home building and contents policies while giving policyholders the option of opting out of flood cover – a recommendation coming out of the Natural Disaster Insurance Review – until after September.
That is when the Productivity Commission is due to release the final version of its Barriers to Effective Climate Change report, which was released in draft form in April.
The commission’s draft report stated that opt-out flood cover “should only proceed if it can be demonstrated that the benefits to the wider community would exceed the costs”, and only “after barriers to effective climate change adaptation in other policy areas are addressed”.
Last week’s Government statement says: “Given the potentially important role insurance can play in adaptation to climate change, the Government will defer consideration of this proposal until the Commission’s final report has been received.”
A well-placed source told insuranceNEWS.com.au the Government “is putting great stock in the Productivity Commission report. I expect it will maintain the status quo when it comes to flood insurance.”
The Government recently undertook public consultations on opt-out flood cover, and when announcing the proposal last November Mr Shorten was bullish about its potential to “increase the availability of flood insurance across Australia, while improving transparency and choice for consumers”.
But signalling it is preparing for an apparent backflip on the issue, the latest Government statement quotes Insurance Council of Australia statistics which indicate that in 2011 “only 2% of households elected to opt out of flood cover when offered the choice to do so by an insurer”.
In practice, it seems, opt-out is a flop.
Further strengthening the case against the opt-out model is the Productivity Commission’s opposition to a system of government subsidies, which have been recognised as necessary to prevent all those consumers with a high flood risk simply opting out under the model.
“Subsidies for insurance premiums would distort risk management decisions and impose costs on the wider community, and should not be pursued,” the commission’s draft report plainly states.
The number of insurers offering flood cover on either a compulsory or opt-out basis has steadily increased since the 2011 floods, to the point where there is an active and competitive flood insurance market offering consumers a range of options.
Earlier this year, the Executive Director of Treasury’s markets group, Jim Murphy, told an insurance conference that Government financial support for flood premiums “can only be justified in economic terms when a market failure can be clearly identified”. That does not seem to be the case.
Dropping the opt-out proposal would be a win for insurers, who have fought against both mandatory flood cover and the opt-out model.
It would also be recognition that Government interference is not necessary when the market is providing its own solution to the problem.
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