A leading economist has called for “rational thinking” in the debate over flood insurance and the proposal to offer discounted rates for high-risk areas.

John Freebairn, who holds the Ritchie Chair in Economics at the University of Melbourne, says people living in flood zones are already compensated by paying lower rents or property prices and shouldn’t be given further assistance through subsidies.

Speaking last week at an Australian Centre for Financial Studies seminar in Melbourne on the Natural Disaster Insurance Review (NDIR) proposal to make flood insurance more widely available, Professor Freebairn said economic rationalism needs to be applied to the debate.

NDIR Chairman John Trowbridge, who is speaking at meetings around the country to present the NDIR’s initial report, says most economic rationalists wouldn’t agree with the suggestion to discount flood cover premiums for people in high-risk areas, but the industry and the community have been left with a legacy of homes built in high-risk areas.

Dr Freebairn says people who live in low-risk areas and pay more for rent or property prices shouldn’t have to pay to cover those in high-risk areas.

“The lower rent should be enough to offset the expect loss,” he said.

He says providing discounts on disaster insurance will only encourage people to live in high-risk areas.

“It reduces the incentives for self-protection.”

Submissions to the NDIR closed last Thursday.

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