With debate in Parliament continuing to rage over the flood levy as independent senator Nick Xenophon pushes for all states to have mandatory insurance safety nets, the issue of how the clean-up of future catastrophes is funded has come into sharp focus.

And it’s refreshing to see some thought leadership emerging from the insurance industry.

Mark Senkevics, MD and Head of Australia and New Zealand at Swiss Re, told insuranceNEWS.com.au he believes Queensland could benefit from a public-private insurance partnership similar to the arrangement put in place by the US state of Alabama last year after the devastation of Hurricane Katrina.

In that case, the Alabama State Insurance Fund purchased parametric insurance cover through which payouts are triggered by the physical characteristics of a catastrophe, such as the windspeed of a hurricane, rather than by monetary losses.

The deal means Alabama’s policy will pay out any time a category three (or above) hurricane passes through a defined geographic area until 2013. Payments can be used for a variety of purposes, including funding emergency response, replacing lost tax revenues, rebuilding infrastructure or funding future increases in insurance expenses.

In Australia, cover against cyclones could use windspeeds as a payment trigger, while cover against drought or flood could also be purchased with rainfall amounts as a trigger.

Mr Senkevics says that while discussions have been held with government entities about such a solution, divisions between the state and federal governments are one barrier to progress.

“Catastrophes don’t differentiate state borders,” he added.

In an interview with ABC Radio, Mr Senkevics also put forward the idea of the Federal Government issuing catastrophe bonds to transfer its risk to insurers, reinsurers and the capital markets.

Historically, developed nations like Australia have not been big users of cat bonds as government budgets can typically cover disaster relief. But given the Government’s proposed $1.8 billion flood levy, this premise is being called into question.

Mr Senkevics has backed Senator Xenophon’s call for the Federal Government to force all states and territories to have insurance after it emerged that Queensland is the only major Australian economy not to have ceded some of its risk.

But Senator Xenophon’s insurance adviser, former Territory Insurance Office CEO John Tsouroutis, is pushing for the formation of an insurance pool for the states and territories, which would spread each state’s risk across taxpayers in all states – not unlike the levy.

At least it’s a pre-event plan, but is it equitable? Cover in Queensland would be higher than in many other states because of its exposure to tropical weather events coupled with its sizeable population and its sheer breadth.

While the Federal Government has announced the formation of a national committee to review the insurance arrangements of the states, Assistant Treasurer Bill Shorten has backed the autonomy of the states in making their own decisions about insurance arrangements.

That’s isn’t surprising, given the Federal Government doesn’t buy insurance cover either.

Framed within this debate, the issue of moral hazard is an interesting one. With the possibility that donations and levy funds may assist uninsured homeowners with their damages bills, and with the Queensland Government set to have its public damages bill largely covered by the Federal Government, the incentive to purchase insurance is under threat.

Not to mention the hypocrisy involved, in what has quickly become a case of “do as I say, not as I do”. Just as the Federal Government can’t reasonably demand the Queensland Government do something which it does not, the Queensland Government’s credibility when asking its residents to buy insurance is surely in tatters.