Insurers should have “flexibility” and not be “forced to provide flood cover”, the Insurance Council of Australia (ICA) says in a submission to the Federal Government.

“Such a move would be potentially damaging if flood products were beyond a particular insurer’s risk appetite,” the council says in its submission on the Government’s proposal on to make flood cover mandatory in all home and contents policies.

The submission is in response to a Treasury consultation paper, Reforming flood insurance: A proposal to improve availability and transparency. The paper was issued in November and is based on some of the recommendations of the Natural Disaster Insurance Review (NDIR). The period for submissions closed on Friday.

ICA says that forcing all insurers to offer flood cover could lead to some companies defensively pricing flood cover or redlining flood-prone areas, with the problem likely to be more pronounced among smaller insurers without the resources to fund additional mapping and reinsurance costs.

“ICA cannot rule out the possibility some insurers may determine that the provision of flood cover within existing residential products is not feasible for their portfolio. As a consequence, some products may be withdrawn from the market.”

The council concedes that the option for consumers to opt out of flood cover will give them “greater confidence in the extent of the cover they have purchased”, but maintains that insurers should be able to decide whether they offer or exclude flood cover, or offer it on an opt-in or opt-out basis.

“The industry is already moving to include flood insurance in most policies and in various forms, such as standard inclusion, opt-out or opt-in,” the ICA submission says. 

It says the availability of flood cover will continue to increase, but if consumers are allowed to choose whether to opt out, some – including those at high flood risk – will choose to do so.

“Commercial experience with individual insurer opt-out flood products since 2007 has shown that there is a higher proportion of consumers who opt out of flood cover where the flood risk (and therefore premium) is high.”

But ICA warns that if there is no opt-out option, some consumers may instead choose not to buy insurance cover at all.

IAG’s submission also contends that insurers should not be compelled to offer flood cover.

The group has made flood a standard inclusion with no opt-out in most policies across its brands. It says this addresses consumers’ desire for greater clarity on insurance for different types of water damage.

IAG says consumers should have the opportunity to choose the cover that suits their needs and insurers should also have flexibility to write risks appropriate to their business model.

“Forcing insurers to offer flood cover or opt-out flood cover would be potentially damaging if flood products were beyond a particular insurer’s risk appetite,” IAG says. “This may actually work to reduce competition in the insurance market.”

Suncorp has not released its submission on the issue, but Personal Insurance CEO Mark Milliner says the decision to extend automatic flood cover to the AAMI brand on an opt-out basis was taken after the 2011 floods “in the best interest of customer choice”.

“The government’s focus should be placed on flood prevention, especially in high-risk areas,” he told insuranceNEWS.com.au.

“While as an industry we can continue to offer flood cover, the premiums will always reflect the risk.”