The report of the Natural Disaster Insurance Review (NDIR), which was released to the public last week, lays out a clear structure for a national flood insurance system. The result of a great deal of consultation and examination by the three-person panel, it deserves greater community attention and debate than it has received so far.

While the joint statement of Assistant Treasurer Bill Shorten and Attorney-General Robert McClelland last Monday detailing the Federal Government’s initial response to the report has grabbed all the headlines, the report itself is quite a different document.

It brings together an impressive variety of views to reach its conclusions, and the Government has shown a high level of commitment to address some of the recommendations already – not least $12 million for a flood risk information portal that goes against the present trend to tighten the budgetary purse strings.

Most of the key recommendations will be addressed in consultations next year. So far the industry’s reaction has ranged from politely positive to non-existent.

Apart from the information portal commitment, much of the ministers’ public response to the NDIR report’s 47 recommendations was aimed at the general media and consumers. The standard definition of flood, for example, was agreed between the parties at least six months ago and was merely awaiting official recognition; and the “key facts” sheet and reforms to the General Insurance Code of Practice to remove some contentious anomalies aren’t central to the flood insurance issue.

The NDIR report proposes two far-reaching changes to the way flood insurance is handled in Australia. The first is flood cover in every household policy, with discounted premiums for high-risk properties. The other is a new agency that would carry considerable influence over the way flood risk is monitored, mitigated and insured nationally.

These recommendations tie the whole flood solution together, with compulsory cover underpinned by discounts and a reinsurance pool backed by government guarantees. It’s an acceptance that you can’t have compulsory inclusion of flood cover without financial adjustments to cater for high-risk properties. Otherwise the flood insurance focus would merely switch from questions of availability to the issue of affordability.

The panel says premium discounts “are a prerequisite for homeowners to be able to afford to purchase flood cover, which in turn makes it possible to deliver on the… conclusion that unequivocal insurance coverage for flood is central to addressing the community need”.

The discounts would be delivered through a model that requires insurers to retain and price a portion of the risk, with the remainder ceded to the reinsurance facility at a discounted reinsurance premium.

Policyholders receiving full discounts would pay for that portion of the risk retained by the insurer, and nothing for the remainder of the risk up to $500,000. Once the risk exceeds that figure, policyholders would have to pay the full cost of the portion of risk exceeding $500,000.

For now, the Government appears to be sitting back waiting to see what the industry has to say about the key NDIR recommendations. But there were already traces of political tinkering in last week’s initial Government response.

The NDIR panel recommended the inclusion of flood cover in all home and contents and body corporate insurance products, but did not mention an opt-out clause; that’s a feature added by the Government.

Such an addition is likely to come in for close scrutiny during next year’s consultations. After all, you can’t opt out of bushfire or cyclone covers when you buy domestic insurance, so why flood?

Some 27 recommendations relate to the mandatory flood insurance plan and the flood reinsurance pool, with the government agency being set up to co-ordinate flood risk management nationally, operate the system discounts and manage the proposed flood reinsurance facility.

It’s a big vision. The report sees the agency co-ordinating flood mapping around Australia and acting as a national repository of flood risk information, monitoring the effectiveness of and advising on flood mitigation initiatives and overseeing the quality of flood risk information.

The agency’s reinsurance facility would also offer reinsurance cover to insurers for cyclone risk, on the same basis as for flood risk but without discounts. And it would charge insurers a small administrative fee for each policy ceded to the reinsurance facility.

The report calls for further investigation into the difficult Far North Queensland property insurance issue “to ascertain whether there is a basis for granting affordability discounts for cyclone risk, along the lines of the recommended flood insurance discounts, for homes and home units in northern Australia”.

Six of the recommendations relate to improved claims-handling and dispute resolution and changes to the General Insurance Code of Practice, which has long been regarded as a document lacking in rigour. The industry has been asked by the Government to examine these recommendations and come up with a response by the end of February. 

Five recommendations relate to improving consumer awareness, and the remaining nine relate to specific issues such as alternative premium payment options and ways to address under-insurance.

All in all, this is an ambitious and intelligent document. The NDIR Chairman, John Trowbridge, sees the report as a “building block” in the overall management of the flood risk issue. He says this as a once-in-a-generation opportunity to fix the problem for good.

Some submissions made to the NDIR earlier this year by insurers and the Insurance Council of Australia were seen more as political point-scoring than serious suggestions, and there is concern that commitment from the industry to the recommendations is not a foregone conclusion.

But the NDIR panel has at least done its job and put the onus back on the industry and the Federal Government to make flood cover a routine part of the insurance landscape. It’s over to them now to make it happen.