The Federal Government has decided against making flood cover compulsory in all home and contents policies, and ruled out subsidies for policyholders in high-risk flood zones.

It comes in response to the Productivity Commission (PC) report Barriers to Effective Climate Change Adaptation, released last week.

Government-funded premium discounts for policyholders in high-risk zones are a key recommendation of the Natural Disaster Insurance Review (NDIR), which followed the 2011 Queensland floods.

But “the costs to the community as a whole of subsidising insurance are likely to exceed any benefits”, the PC report says. 

“In essence, subsidies would not reduce the physical risks that individual properties face, but would mean governments bear some of the losses to these properties.”

In its response, the Government accepts this position and agrees “it is not clear that premium subsidies would directly assist those households that are most in need”.

The Insurance Council of Australia (ICA) has welcomed the decision. “Government subsidies would distort the insurance market, might not assist those most at need and may serve to encourage rather than discourage development in at-risk communities,” it said.

The PC report says the Federal Government should only “require all household insurers to offer flood cover if it can be demonstrated that the benefits to the wider community would exceed the costs”.

In response the Commonwealth says it will not proceed with the proposal, despite the NDIR recommendation for compulsory flood cover with a consumer opt-out.

The Government says it is more appropriate to address areas that affect the provision, cost and uptake of insurance, such as phasing out taxes on policies or investing in flood-prevention, in line with its recent $100 million mitigation announcement.

ICA has again backed the Government’s position. It says mandatory flood cover would “remove consumer choice and potentially increase costs and narrow competition in the market”.

The PC report describes current levies on insurance policies as “inefficient” and “a barrier to effective adaptation to climate change”. It recommends they be “phased out and replaced with less distortionary taxes”.

The Government agrees in principle, but says such taxes are “a state and territory government responsibility”.

John Trowbridge, who chaired the NDIR committee, says his review recognised the “series of economic arguments” advanced by the Productivity Commission to suggest that any steps on flood insurance affordability that involve intervention in insurance markets “may be ineffective or expensive”.

“In preparing its proposals [the NDIR] made a strenuous attempt to overcome them so as to meet both the economic questions and the community issues,” Mr Trowbridge told insuranceNEWS.com.au.

“The commission report does not do that and as a result it recommends no action on affordability.”

He says the Government’s acceptance of the commission’s “no action” recommendation means “the primary affordability question for flood insurance remains unresolved”.

Gerard Brody, Director of Policy and Campaigns at the Consumer Action Law Centre, says he is unsurprised by the response but is disappointed the Government has not considered the subsidy scheme.

“Affordability issues are just going to continue,” he told insuranceNEWS.com.au. “Unless they deal with affordability we are still going to have problems with access to insurance.

“We realise you can’t have mandatory cover on its own. You need to deal with affordability as well – you need both.

“A lot of work and thought went into the NDIR. We hope the National Insurance Affordability Council will be one way to continue to look at these issues.”