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Shallow solution: do floods expose pool limitations?

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Devastating floods across Queensland and NSW are shaping up as one of Australia’s worst natural catastrophes on record, with insured losses expected to go well beyond $2 billion.

Communities like Lismore have been hit by record-breaking inundation and many residents have already announced they’re uninsured for flood, citing annual premiums of $25,000 or more.

Meanwhile, the Federal Government is pushing on with its much-heralded cyclone reinsurance pool, which it says will cut premiums almost in half for the worst-affected homeowners.

Scepticism over these savings is well documented, but even if the pool works as planned it has a narrow focus.

The pool is restricted to cyclone damage and cyclone related flooding within a strict timeframe, and it’s hard to see how the residents of Lismore – and many others in risk-prone communities across the country – could benefit.

They can’t afford the insurance they need either, so why no government intervention for them?

Increasingly, questions are being asked about whether the cyclone pool as it stands is the right approach. Below, we highlight some other considerations.

A broader pool

If the cyclone pool is too narrow, what about a flood pool? Or even a natural disaster pool?

Following the last flood event of this scale in 2011, a Natural Disaster Insurance Review recommended a “flood risk reinsurance facility” tied to incentives to reduce the risk.

One of the authors of that report, lawyer John Berrill, says it’s still the best approach, and that while the proposed cyclone pool is “a small start” it won’t solve the problem.

“These events become a cycle,” he tells insuranceNEWS.com.au. “It’s an affordability whirlpool that caves in on itself.

“Yes flood cover is available now, but in Lismore the cost of premiums means people have opted out of flood or not insured at all. After this, the premiums will go up again.

“We are really at the point where we have market failure.”

One of the key proponents of the cyclone pool, veteran Leichhardt MP Warren Entsch, believes once it’s up and running it should be expanded to other risks.

“I think it’s something we can start to apply more broadly, once we’ve got it right, to include floods, fires and other natural catastrophes,” he told the Guardian.

University of Queensland Professor in Strategic Management Paula Jarzabkowski argues that a broader pool known as a “protection gap entity” is required, as is in place in France, Spain and Switzerland.

“The private insurers pass on the risk to the state-owned protection gap entity, which uses the pooled premiums to ensure everyone is covered for their specific disaster,” she writes in an article on The Conversation.

A protection gap entity would also use data to reduce risk. Those in France and Switzerland are directly connected to the government system of planning and building regulations, so the data can be used to build future resilience. They also make sure insurance payments for damaged properties are used to rebuild in a disaster-resilient way.

Describing the cyclone pool as “half-hearted”, she says it will ultimately fail.

“The proposed pool won’t stop the vicious cycle. It could do so, but only if the government is willing to refashion it along the lines of a protection gap entity.”

But the insurance industry isn’t keen on a flood reinsurance pool. Suncorp Group CEO Steve Johnston told the ABC all a wide-ranging pool will achieve is “passing the buck” from the private market to the government.

And the Insurance Council of Australia (ICA) told insuranceNEWS.com.au that investment in resilience and mitigation measures is a more targeted and efficient approach, and “a flood reinsurance pool is not required at this time”.

It says the private insurance market is more effective because of the risk signal that it provides, arguing that it’s much better to cut the underlying risk than effectively subsidise people to live on floodplains.

Moving communities

Coordinator-General of the National Recovery and Resilience Agency Shane Stone caused a stir last week by telling Nine newspapers some inundated homes should not be rebuilt.

“You’ve got people who want to live among the gum trees – what do you think is going to happen? Their house falls in the river, and they say it’s the government’s fault,” he said.

Labor politicians attacked the comments, accusing Mr Stone of insensitivity and “victim blaming”.

Whether he is advocating large-scale community relocation is unclear, but it’s been suggested before and has happened in the US.

Most say the cost would be prohibitive, but can it really be more expensive in the long term than rebuilding the same homes over and over again?

ICA told insuranceNEWS.com.au that “all tools” to improve resilience should be discussed.

And one industry source believes a “limited buy-back program” is likely to come into play at some point.

Whether people want to leave their homes is of course a whole other story.

Mitigation measures, land-use planning

This is the industry’s mantra, and has been for years. While welcoming the cyclone pool, the ICA argues it won’t work on its own and the only long-term solution to premium affordability issues is to reduce the risk through mitigation works.

And in the meantime, let’s at least not make the problem any worse by continuing to build on floodplains. We’ve probably all seen the image circulating on social media of the “waterfront development” sign which is… erm… under water.

Prior to the latest floods ICA released a detailed document aimed at politicians, outlining a list of required measures.

First and foremost it wants Commonwealth investment in extreme weather resilience measures doubled from $100 million to at least $200 million a year, or $1 billion over the next five years, matched by the states and territories.

The message does appear to be getting through, helped in no small part by the current catastrophe. Labor has backed the ICA’s calls on spending, and comments from the Prime Minister reported by insuranceNEWS.com.au last week suggest he now understands the industry’s logic.

But while politicians finally accept mitigation work is desperately needed, they appear to be concentrating on blaming each other for not doing more sooner.

The industry will be hoping that the end result of all this squabbling will be that what needs to be done, gets done.

Cutting carbon emissions, faster

When we talk about solving the underlying problem, surely that needs to include cutting carbon emissions – because scientists agree the reason we are seeing an increase in frequency and severity of natural catastrophe events is man-made global warming.

However, the ICA’s election platform doesn’t include any calls to reach net zero quicker, or for a faster retreat from fossil fuels.

Of course the industry supports action on climate change, and of course it’s committed to net zero by 2050, but it doesn’t push harder for more action, for a range of reasons.

Not least, it’s a global problem that Australia can’t solve on its own, and certain impacts are already locked in.

But many wonder why there isn’t more industry focus on this issue – because even flood levees only take us so far if the waters keep rising.