Australia’s $6 billion flood catastrophe last year devastated many communities, and it may yet have a significant impact on how home insurance policies operate in future. 

Flood cover continues to confuse consumers and frustrate insurers, and despite endeavours over many years, a solution remains out of reach. 

Prior to the Queensland floods of 2010/11, flood was routinely excluded by insurers, but the backlash after thousands were left uninsured in those events was savage. 

A standard definition was brought in, and most home insurers now offer flood cover, which is distinguished from storm damage, or rainwater runoff. 

Flood is defined as “the covering of normally dry land by water that has escaped or been released from the normal confines of any lake, river, creek or other natural watercourse, whether or not altered or modified, or any reservoir, canal, or dam”. 

The problem is the level of flood risk in some areas, which can lead to unaffordable annual premiums of $30,000 or more. 

In response to this issue, some insurers allow consumers to opt out of flood cover if they are in a high-risk area, so they can at least be insured for every other risk.  

Allianz has a product like this, as does IAG’s NRMA Insurance – although NRMA’s product groups rainwater runoff and storm surge with flood, so if you opt out of flood, you opt out of all three. 

Other insurers, such as QBE, don’t give the option to opt out. You either pay for their product, including flood, or you’re not insured by QBE. 

The optional product seems sensible. Many consumers welcome being able to insure for fire, earthquake, storm and other perils, even if they can’t afford flood. But there can be a heavy price to pay after events like last year’s. 

As a consumer, if you’re flooded, you are likely to lodge a claim – whether or not you opted out of flood, sometimes years before. Your greatest financial asset is in ruins, so why not put in a claim and argue that you were inundated by storm water, not flood? 

This then requires a hydrologist to make an expert judgment on your claim, and which type of water led to the damage. 

It’s a complex process, and with 240,000 claims from one event, hydrologists were in short supply last year. It was one of the main reasons that claim timelines blew out. 

Insurers don’t want to be denying claims without proof that they were right to do so, so they pay emergency payments, and cover the costs of temporary accommodation, while the waiting for a hydrologist goes on. 

Even NRMA Insurance’s policy, which reduces the likelihood of disputes because all ground-level inundation is grouped together, doesn’t save the insurer from these costs. insuranceNEWS.com.au understands that IAG also paid out for temporary accommodation for three months, as a matter of course, to help desperate customers. 

If it is proven to be flood water that swept through a community, claims will eventually be denied en masse, leading to unhappy insureds likely to complain to the Australian Financial Complaints Authority and anyone else who’ll listen. 

The insurers offering the ability to opt out of flood end up covering the vast majority of homes in flood risk areas. They are on the hook for millions of dollars in initial payments, for which they’ve never received a cent in premium, and they suffer significant reputational damage for denying claims, however legitimately. 

As a result, these products are under threat.  

Allianz is reviewing its optional product, saying that last year’s events “called into question the sustainability of maintaining such a model for optional flood cover”.  

insuranceNEWS.com.au understands that IAG is also considering the future of its product, although the company says there are no planned changes at this stage. 

The Deloitte report into last year’s floods, commissioned by the Insurance Council of Australia, comments on the issue, saying policyholders still don’t understand definitions of flood, storm and stormwater run-off, and “the structure of the definitions” means that a hydrologist is often required. 

Hydrologists were in short supply last year “and will likely always be” after a flood or storm, the report says, so “claims impacted by these terms” took longer to assess. 

“There were some policy terms that resulted in longer claim handling timeframes; for example, because the policy term required an expert assessor that was likely to be in short supply.  

“With the volume of claims impacted by CAT221 and other floods, this exacerbated delays, and customer frustration as well as insurer costs.” 

The report stops short of recommending a way forward, but the problems caused by the current situation are clear. 

Some predict that the days of the optional flood product are numbered. It slows down claims, and leaves insurers with bruised reputations and drained funds. 

But is that fair on consumers? It could mean thousands of homeowners being kicked out of insurance altogether, which, as well as leaving them horribly exposed, would have knock-on effects for the home lending market. Building insurance cover is often a requirement for those looking to access a mortgage. 

 The Financial Rights Legal Centre says that the removal of the optional products “would not be a good outcome”. 

“We think that consumers should be able to access some insurance, rather than none,” Senior Policy and Communications Officer Julia Davis tells insuranceNEWS.com.au. 

“We don’t like the idea of the entire market removing the option to opt out [of flood]. It would mean growing numbers forced out of insurance altogether.” 

Of course, the real crux of the issue remains the number of homes exposed to high flood risk in Australia, and the impact this has on the cost of flood cover. 

The Federal Government recently doubled down on its commitment to mitigate the risk, and poured cold water on interventions such as flood pools or subsidies. 

But if optional flood products do disappear, could the Government be forced to change its tune? 

“You can’t opt out of cyclone cover, and we ended up with a cyclone pool,” one industry source said.

“The Government has been able to kick the flood issue down the road, but if 100,000 people get booted out of home insurance altogether, they are going to have to do something.”