The Federal Government appears to have closed the door on the idea of discounted insurance premiums for policyholders in high-risk flood zones, instead opting to tackle the flood affordability issue with increased spending on mitigation.

Prime Minister Julia Gillard last week announced the National Insurance Affordability Initiative, a plan to spend $100 million over two years on a series of mitigation projects, aimed at reducing both flood risks and insurance premiums.

As part of the plan, the Federal Government will also establish a National Insurance Affordability Council, to co-ordinate flood risk management, make recommendations to the Government on flood and other natural disaster mitigation projects and undertake other functions directed at reducing natural disaster insurance premiums. 

“Minimising damage from flood and other natural disasters is the only sustainable way to reduce insurance premiums over time, rather than have taxpayers cross-subsidise insurance premiums for those in areas of high risk,” Ms Gillard said.

The Natural Disaster Insurance Review (NDIR), which was conducted after the 2011 Queensland floods, had recommended a system of premium discounts backed by government funding as part of the solution to tackle the affordability of flood cover.

NDIR panel member John Berrill says the latest announcement is “pleasing”, and does not necessarily sink the NDIR’s recommendation of a government reinsurance-backed flood pool offering discounts to high-risk properties.

Mr Berrill told insuranceNEWS.com.au he and fellow NDIR panel members John Trowbridge and Jim Minto “hope that the National Insurance Affordability Council deals with the remainder of the affordability issues and recommendations” of the NDIR.

“The mitigation spend on its own won’t solve the problem,” he added. 

Up to half of the money – $50 million – has been committed to help fund the raising of the Warragamba Dam wall in western Sydney’s Hawkesbury-Nepean Valley – a project that has been costed at more than $500 million.

The NSW Government is currently conducting a review of flood mitigation options for the area, which is considered by many to be Australia’s biggest flood risk with the potential for a major flood to cause up to $8 billion in damage. 

The funding shortfall will have to be made up by the NSW Government if it elects to proceed with the project.

Other priority areas identified by the Federal Government include two major Queensland projects: a $7 million contribution to building the Roma levee and $10 million to upgrade flood defences in Ipswich.

Announcing the initiative on Thursday, Ms Gillard said she hoped state governments will respond to the funding announcement by increasing their own contributions to mitigation projects.

Under the Government’s plan, the National Insurance Affordability Council will also “closely track” the strata title insurance market in northern Australia to consider “whether there is a role for government in sponsoring mitigation work to alleviate insurance premiums in those regions”, following the outcome of a study by James Cook University and the Insurance Council of Australia (ICA) assessing the vulnerability of strata-title buildings in tropical Australia.

The insurance industry has welcomed the mitigation funding, with the Insurance Council, National Insurance Brokers Association, IAG and Suncorp all expressing their support for the plan.

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