The Federal Government’s Natural Disaster Insurance Review is advocating a “full flood cover” solution to the availability and affordability of flood insurance, which will mean that all insurers selling home insurance will be required to include flood cover on all properties.

Review Chairman John Trowbridge told the Institute of Actuaries flood resilience seminar in Sydney last week that the “full flood” option, along with two other options, will be the focus of an issues paper due to be released by the review panel shortly.

The first of the other options being considered is maintaining the status quo – where insurers can choose whether or not to offer flood cover and consumers can choose whether or not to purchase flood cover. But Mr Trowbridge says access to flood insurance “is not at the level it would need to be” for this option to be viable.

The third option being considered is described as an “opt-out” model, where all insurers offering home insurance must provide flood cover, but consumers can elect whether or not they buy it.

“The opt-out model doesn’t really look like it would fix the problem we are facing,” Mr Trowbridge said, noting it doesn’t address the issue of flood cover affordability.

Under the full flood proposal, which he described as “simpler” than the other options, all home insurers must offer flood cover and all consumers purchasing home insurance must buy it.

“Full flood is really the only one that would solve the political and community problem that has been present in Brisbane and Ipswich,” Mr Trowbridge says. “The big issue is the fact that many people who have got insurance don’t have flood cover.”

He says the full flood model would eliminate non-insurance and disputes over the cause of water damage and may also generate more confidence in the insurance industry and give insurers greater brand protection.

But leading insurers have already criticised this approach, with both Suncorp and IAG saying the “full flood” proposal may fail to discourage building in flood-prone areas and that the compulsion to provide insurance for all risks is unfair on insurers.

Mr Trowbridge says that in order to address the affordability of compulsory flood cover for those properties at highest risk of flooding, the full flood model would feature insurance discounts for those properties deemed at highest risk.

He says the issues paper will explore funding options for the discounts, but ultimately the bill for any discount would be met by consumers.

“If you’re going to have a set of discounts then you’ve got to fund them from somewhere,” he said.

Funding options under consideration include insurance industry funding, which would ultimately be passed onto policyholders; council funding which would be passed onto ratepayers; or government funding via taxpayers.

Mr Trowbridge says the discounts may not apply for new properties knowingly built in high-risk areas and could be structured to phase out after a period of time.

Ways to identify which properties would be deemed at highest risk and which would therefore be eligible for the discount will also be considered in the issues paper, but Mr Trowbridge says one possible way to establish the risk threshold would be to use engineering techniques such as flood mapping and building and land features.

An alternative method, using an insurance market mechanism based on risk pricing, may create a problem if insurers are seen to be “bumping up” prices or “gaming the system” to try to avoid covering the upper end of the low-risk segment.

He dismissed suggestions that the Government should offer flood cover for those at highest risk, saying that the Government would only do so if it deems there has been a market failure – which it defines as where insurance is not “available and affordable”.

“That condition has not been met by current market conditions,” Mr Trowbridge said.

The review panel’s issues paper will be open for industry responses before a final report is released by the end of September.