For all of the Government’s recent announcements on mitigation works and flood cover, the issue of short-term affordability of insurance remains unsolved.

Insurance Council of Australia (ICA) CEO Rob Whelan last week aptly described the affordability of flood cover as “the elephant in the room” to delegates at the Australasian General Insurance Exchange conference.

He is right. Despite the Federal Government’s recent decision against making flood cover compulsory for insurers to offer in all home insurance policies, in reality it practically is.

More than 80% of home and contents policies in Australia now provide flood cover, and Mr Whelan says most do so as standard, preventing consumers from opting out.

In 2006 just 4% of household policies offered flood cover, and while the industry has answered the Government’s call to make flood cover more widely available, it has come at a cost.

The consequence of the enormous expansion in the availability of flood cover is that the risk and exposure profile of our major insurers has changed dramatically. The cost of cover, in some parts of the country, has skyrocketed.

The other recent decision by the Government to rule out subsidies for policyholders in high-risk flood zones further exacerbates the affordability issue at the pointy end of the market.

And as Mr Whelan correctly told the gathering, “Government is disinclined to intervene in the market because they recognise it is an expensive problem”.

But ICA supports the Government’s position against premium subsidies, stating that such subsidies would distort the market and not send the appropriate price signals to consumers to reflect the actual flood risk they face.

The flipside of actuarially pricing to the true risk posed by flood is negative mainstream media and political attention, but there is an element of hysteria around the issue. On further examination, Mr Whelan says the affordability problem, while significant, is not particularly widespread.

He says that “unpacking’ the affordability problem shows it is geographically concentrated to Queensland and parts of Victoria, and also concentrated in home and contents and SME business lines.

For the five years to 2012, Victoria contributed around 23% of household premiums nationally but accounted for around 27% of claims payouts, while Queensland contributed around 22% of premiums, receiving about 28% of claims, an underpricing situation that was clearly not sustainable.

The affordability issue, defined by Mr Whelan as arising because the market’s capacity to pay has become out of balance with the price charged, is limited to 55 local government areas in Australia. Some 40 of these are in Queensland, ICA says.

Mr Whelan pinpoints mitigation as a large part of the answer, and it undeniably has a big role to play. But mitigation will take time, and there are questions as to whether it is the total solution.

Nicholas Scofield, the GM of Corporate Affairs at Allianz Australia, says not all flood risks can be mitigated “and even if they could it would take tens of billions of dollars of government investment over many decades to achieve”.

“Australia has, and will continue to have, a substantial flood problem impacting large numbers of property owners,” he told insuranceNEWS.com.au.

Jim Donelon, the State Insurance Commissioner for the US state of Louisiana, oversaw that state’s recovery from Hurricane Katrina. He told insuranceNEWS.com.au last week that when homeowners insurance premiums surged following Katrina, affordability was, in part, addressed by a more widespread introduction of hurricane deductibles.

Aside from standard excesses on home and contents policies, insuranceNEWS.com.au investigations have not found any specific flood excesses on policies in the Australian home insurance market.

Suncorp EGM Customer Product and Pricing for Personal Insurance Natasha Fenech says Suncorp has considered introducing flood excesses, but customer research was against the idea.

She says the research suggests consumers would find it confusing and that they would instead favour the ability to opt-out of flood cover completely.

But opting out is not fixing the problem, and with the Government having effectively washed its hands of the affordability issue, perhaps flood excesses warrant re-examination as a piece of the puzzle posed by flood, which remains the insurance industry’s elephant in the room.