Consumer groups have supported compulsory flood cover, but with premium discounts to ensure it is affordable for low-income earners and people living in high-risk areas.

The Consumer Action Law Centre, Financial Counselling Australia, Insurance Law Service and Victorian-based Footscray Community Legal Centre reject the “opt-out model” which would require insurers to offer flood cover for home building and contents policies, while giving consumers the choice of not taking up the cover.

A joint submission to the Treasury consultation on reforming flood insurance says that if flood cover is available without affordability mechanisms and consumers have the choice of opting out, those in high-risk areas are unlikely to increase their cover.

“The opt-out model will be almost completely ineffective if not supported by affordability mechanisms,” it says, adding that the projected premiums in the moderate-risk category will strain many budgets while most households in the extreme category will find insurance unaffordable.

The submission says that if opt-out is offered even when the insurance is made more affordable, it will still be less effective at increasing coverage than the model the Natural Disaster Insurance Review (NDIR) proposed, which recommends compulsory cover with premium discounts for flood-prone areas.

“Under the opt-out model there is a real risk that consumers will decide to opt out of flood insurance rather than pay the additional premium,” the submission says. “This is a much less daunting decision than deciding to do without insurance cover entirely.

“Consumers will be particularly likely to opt out of flood insurance if they have a low income, live in a high flood-risk area, or both. We believe the opt-out model will actively encourage consumers who most need flood insurance to go without it.”

The submission says compulsory cover will remove disputes over whether damage is caused by flooding or storm, as both will be included.

The groups say risk awareness will not make flood cover more affordable and consumers at risk might still take a chance rather than pay a large sum to cover the possibility of an irregular event.

The submission says a reinsurance facility subsidised by the Commonwealth and states should fund premium discounts, as the NDIR proposed.