The Institute of Actuaries of Australia (IAA) has called for a temporary flood insurance pool, saying such a move will encourage flood mitigation and mapping.

In a its submission to the Natural Disaster Insurance Review (NDIR), the institute says the pool would subsidise premiums on high flood-risk property, but would be contingent on those affected implementing risk mitigation.

The IAA warns that subsidising premiums without encouraging mitigation can inadvertently encourage risky behaviour.

CEO Melinda Howes says a pool can be used to encourage stakeholders such as property owners, developers and local governments to undertake flood mitigation, unlike a direct government subsidy.

“The pool would allow you to have very clear financial incentives built into the way it operates,” she told insuranceNEWS.com.au.

A council might have to show it is undertaking mitigation work before houses within its boundaries could access the pool.

“With a pool you can tell a developer they can sell a block of land but they have to contribute $100,000 from the sale into the pool.”

Ms Howes says a direct premium subsidy in Florida was found to encourage development in high-risk areas because it reduced the developers’ costs without giving them any incentive to reduce risk.

The IAA does not suggest how the pool should work, although it envisages it would exist for 10-15 years until flood risk is reduced to an acceptable level. It says the pool could be funded by taxpayer levies, a broad increase in premiums for all insureds or direct government funding. 

It recommends the pool cover all loss related to “water off the ground” to avoid confusion, and cover loss from both flood and actions of the sea, with a possible extension to other natural disasters.

Although the institute differs from the Insurance Council of Australia in how premiums would be subsidised, Ms Howes says they agree on the need for flood mapping and mitigation. “It is absolutely fundamental.”

The IAA says the primary focus of the pool would be risk mitigation. It also calls for government-funded, single national standard flood mapping. It suggests the Government investigate whether catastrophe bonds could be used to fund natural disaster losses.

The submission argues mitigation aimed at protecting property from flood risks, such as revising building codes, planning rules, building dams and levies, and undertaking re-location and renovation of existing properties, is more likely to be cost-effective in the long term compared with the current approach of post-event funding of natural disaster-related losses.

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