The Natural Disaster Insurance Review’s preferred “full flood” insurance solution would create difficulties for smaller insurers who would be unable to fund the proper risk assessment required to offer flood cover.

Under the full flood proposal, which will be considered by the Federal Government and which is the stated preferred option of the review committee, all home insurers would have to offer flood cover and all consumers purchasing home insurance would have to buy it.

But Merrill Lynch research analyst Andrew Kearnan told insuranceNEWS.com.au that such a situation could disadvantage smaller players in the home market.

“Mandating cover may put smaller insurers at a disadvantage or provide an early-mover advantage for some insurers,” he said.

Potential beneficiaries would be Suncorp, which has invested heavily in risk assessment to allow it to already offer flood cover in much of Queensland and other parts of the country, and IAG, which offers flood cover in some parts of Australia.

But while forcing insurers to provide cover without assisting them with flood mapping seems unfair, Mr Kearnan says a Government-funded national flood mapping scheme would be politically sensitive and “mired with problems”, such as affecting property values in flood-prone areas.

Asked whether smaller players might effectively set premiums so high they price themselves out of flood risks – and therefore the home insurance market – Mr Kearnan says “that would be one approach”.

“The question for small players is, can they offer this type of risk? If you can’t understand the risk, you can’t price it,” he said.

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