First the deluge, now the storm.

The consumer backlash to compulsory flood cover is likely to signal one thing: the Federal Government is less likely to make flood cover mandatory in insurance policies.

If the news stories and complaints by MPs continue, the Government can be expected to give insurers the discretion to offer consumers an opt-out provision. It would be one recommendation of the Natural Disaster Insurance Review (NDIR) that does not get adopted.

The review recommends that flood cover be included in all home and contents policies and says discounted premiums are needed for houses in areas of medium and high flood risk, so that insurance remains affordable. The Federal Government is currently considering the recommendations delivered in the November report.

Insurers who have already decided to make flood cover a standard inclusion, such as CGU and RACV Insurance, may lose business if the Government decides to let insurers decide on a flood offer. They have both already come under fire from outraged policyholders who say they are being charged for flood when they have no risk.

Both companies argue that making the cover mandatory gives consumers certainty and ensures there will be no repeat of the complaints that led to the various government inquiries being established last year.

In making their decisions, CGU and RACV did consider offering consumers a choice to opt out but decided in favour of offering absolute confidence.

CGU began working on the issue after the flooding over summer in 2010/11 and Director of Personal Lines Portfolio Management Reece Williams says when his team spoke to customers, intermediaries and partners it was repeatedly told they were looking for increased certainty.

Mr Williams says most people struggle to understand the difference between storm and flood and many were surprised last year to find they weren’t covered.

CGU considered waiting to see whether the Government would make flood a standard inclusion but decided it was more important to have cover in place for another flood season.

The insurer’s policies included flood cover from February 1, and Mr Williams says householders who were covered from that time have already made claims.

“Today we have people on the ground in southwest Queensland assisting customers with their flood claims,” he says.

“That offering of certainty is right there; we are not waiting for expert opinion and a hydrologist’s report to determine whether it is flood or storm, we are on the ground assisting with claims. 

“That is the difference of the offer and the strength of the offer.”

Mr Williams acknowledges that some people might switch insurers, but says around 90% of CGU customers have no flood exposure and are not being charged any extra premium.

The increase for those at risk varies by state and their level of risk. Not everyone will see an extreme increase, he says.

RACV Insurance says most consumers will see a minimal increase in their premium, while those in flood-prone areas will have increases that reflect their risk.

The public outcry over compulsory flood cover has tended to come from regional areas that have experienced flooding but where some policyholders say they have no risk.

Victorian state Nationals MP Bill Sykes has told constituents to negotiate with their insurer and shop around if they are dissatisfied, after meeting RACV Insurance GM Paul Northey to discuss complaints about cover.

The controversy around the issue reflects the fact that people who are unlikely to experience flood don’t want to pay for cover, making the cost high for those who are at risk.

It also obscures the recommendations from the NDIR that are designed to lessen the impact. Although the review wants cover included in all homes and contents policies, it recommends that discounts to premiums be available on eligible existing homes. These would be phased out over time and the review suggests mechanisms to fund the discounts, while still enabling insurers to price for risk. 

The current lack of a mechanism to soften the blow concerns consumer groups. Consumer Action Law Centre Policy Director Gerard Brody says the centre believes flood cover should be mandatory but that issues of affordability have to be dealt with to prevent households dropping insurance altogether because they find it too expensive.

He says households facing a significant increase in premiums because they are in high-risk areas should receive some form of rebate, as recommended by the NDIR.

While the centre wants to see flood cover in all contracts, “In the absence of a rebate, we think an opt-out system is appropriate”, he told insuranceNEWS.com.au.

The value of flood cover is being proven again this month in Queensland and NSW, but many consumers are struggling with the price they have to pay.

Now it’s up to the Federal Government to make a decision on the recommendations that came out of the NDIR, particularly on opt-out and whether high-risk households will be subsidised.