When insurers fail to meet public expectations there are inevitably calls for state intervention, and this year’s catastrophes have revived calls for governments to step into the insurance market.

The Federal Government is being asked to intervene in pricing and provision of insurance; to compel insurers to provide flood cover or provide a subsidy to make it more widely available; and to reduce the cost of cover in Far North Queensland.

While the Government considers the report from the Natural Disaster Insurance Review, it might ponder the cost. When the state steps in where the private sector fears to tread, the likelihood is that taxpayers will have to foot an ever-increasing bill.

This has been the outcome of the US National Flood Insurance Program, which has nearly run out of money a number of times in the past decade.

The US Government bears all the risk under this public-private partnership. The crisis within the program has prompted Congress to try to shift some of the risk to the private market by giving the Federal Emergency Management Agency (FEMA) the power to buy reinsurance to offset its risk.

However, the program has such large losses that this has raised issues of how much reinsurance FEMA can afford to buy, whether it should raise premiums, and whether it can obtain enough reinsurance to justify the cost of purchase and offset its risk effectively.

One benefit of government involvement is the ability to compel consumers to take up insurance, as is the case with third-party motor vehicle cover and workers’ compensation.

However, Deloitte Partner Elaine Collins says state involvement in insurance becomes fraught when applied to non-compulsory cover.

She sees the biggest disadvantage is the effect on risk mitigation – that by shifting responsibility to the state, consumers, city planners and developers will be less concerned with reducing risk. An example of this is the tendency to allow construction in flood-prone areas.

“It is not necessarily consumers themselves; it is the related risk mitigation in society, a combination of governments and councils and people themselves,” Ms Collins told insuranceNEWS.com.au.

“On the other hand, if there is no support for consumers who are exposed to a lot of risk then it seems unfair, and we like to be a just and fair society.”

Ms Collins says any proposals for governments to subsidise or otherwise intervene would require considerable work to ensure risk mitigation is not discouraged and the call on the public purse has controls. She says some experts have concluded that finding a balance is impossible.

La Trobe University Associate Professor in the School of Law, Rachel Carter, says an insurance subsidy discourages individual responsibility and creates a problem in the effort to provide help.

She says it can be difficult to apply a generalised approach to insurance, particularly in Australia where the diversity of risk means a program that works well in one state will not suit other parts of the country.

Ms Carter says there is little research available into the suggested proposals coming out of the various disaster inquiries, and notes that while they focus on insurance “you need to deal with the problem as well”.

She says the current regime of disaster relief is based around the aftermath of a disaster, rather than addressing the key problems that led to it. Inquiries resulting from the Queensland floods and Victorian bushfires have focused on the insurance response, when work on mitigation would benefit individuals, governments and private sector stakeholders such as insurers.

The US flood insurance program has highlighted distortions that can occur with a government safety net. Ms Collins says there is evidence that developers have built properties valued up to $US250,000 in some coastal areas because the flood program pays out up to that amount.

She says there is a “patchy record” on partnerships between government and private sector when it comes to insurance, but discussion of the issues is nevertheless welcome.

“It is good to have a debate, because controls need to be in place if the taxpayer does foot the bill.”

The discussion going on at present also raises public awareness of insurance and risk mitigation, but “the disadvantage of going on too long is that it gets too hard and no solution is reached”.