The classic dilemma with flood insurance is that people with no risk don’t want to pay for cover, raising the cost for the small proportion of those at risk, who then can’t afford it.

The industry has addressed this by capturing unwilling buyers with mandatory flood cover on many policies, forcing the majority to contribute to the losses of the few.

Yet people with risk are still opting out when the option is there, despite the 2011 floods showing how devastating such events can be.

This is one reason why the industry is arguing for a rethink of the Natural Disaster Relief and Recovery Arrangements.

It has told the Productivity Commission inquiry into disaster funding that if the Government picks up the bill for preventable disasters, there is no incentive for councils, planners and consumers to accept responsibility for their risk.

Insurers want a more co-ordinated approach to information-sharing and mitigation and less government aid when individuals and communities fail to recognise and reduce risk. 

IAG gives an example of this in NSW, where 40% of NRMA Insurance customers have opted out of flood cover from their home insurance policies “despite living in a location at risk of flooding, sometimes for a saving of as little as $50 a year”.

Suncorp says one NSW customer received a $1000 grant following the 2011 floods, then renewed their policy with a $1000 excess – because of the assistance.

“This has not only increased the individual’s reliance on future government assistance, it has also exposed them to substantial additional risk for non-disaster events such as a small kitchen fire, for which no government assistance is available.”

IAG says insufficient funding is allocated to collecting data to help planners and consumers make decisions; it notes the cancellation in the last federal budget of $50 million for flood mitigation in the NSW Hawkesbury-Nepean region.

“Additional funding is needed to allow protective works including barrages for unusual tides, levee banks, sea walls, properly maintained fire breaks and access trails, improved drainage and dams,” it says.

Suncorp says updated information on Port Douglas allowed it to give a nil flood rating to a large section of properties previously rated as low to medium risk.

Premiums were cut by up to $1000, potentially saving the community $2.5 million a year.

The Federal Government spends about $560 million a year on post-disaster relief and recovery, compared with $50 million on pre-disaster relief, according to the Australian Business Roundtable for Disaster Resilience & Safer Communities.

Disasters lead to total economic costs of $6.3 billion a year, forecast to grow by 3.5% annually due to population growth, density and movements to vulnerable regions such as the coast.

The roundtable suggests appointing a national resilience adviser and a business and community advisory group to develop a co-ordinated response and ensure businesses and the non-profit sector are represented in policy development and decision-making.

Swiss Re wants a country risk officer appointed to identify all risks the Federal Government carries and set risk appetite, retention and transfer.

It says incentives for effective risk management and insurance should not be decoupled.

QBE argues that while insurance is a socially valuable and effective tool for transferring and mitigating risk, “the expectation that insurance alone can bear this risk is not realistic”.

Its submission says insurers have the technology to understand their risk better and regulators are directing them to buy more reinsurance, which could lead to consumers being charged more.

Despite these warning signals, local, state and territory governments “continue to allow development in areas that are considered high-risk flood or bushfire zones, with limited risk-mitigation strategies required of developers”.

QBE proposes increased transparency and disclosure to property buyers.

“Local government disclosure of natural peril risk to consumers – at time of purchase or occupation – will enable better informed choices to be made by individuals, enabling individuals to assume more personal accountability and responsibility.”

The National Insurance Brokers Association says natural disasters are having a significant impact on the insurance market, particularly in north Queensland.

It points out the mismatch between local and state governments that control planning and development and the Commonwealth Government that has to pay for disasters. It wants to see responsibility lie with all levels of government.

The Insurance Council of Australia calls for increased “betterment” – rebuilding of damaged infrastructure in a way that reduces future exposure.

That’s easier said than done, according to local councils, which say funding for upgrades is difficult to obtain (see other story).

Several insurer submissions send a warning on failure to address natural disaster peril, noting companies can increasingly price risk to individual addresses and insurers, if no one else, will send a hip-pocket price signal about risk.

The Productivity Commission will produce a draft report in September and begin public hearings after that. Its final report is expected to go to the Government in December.