Treasury has given its strongest signal yet that the Federal Government is unlikely to offer subsidies to help make insurance premiums for properties in high flood risk areas more affordable.

Speaking at the General Insurance Exchange conference in Sydney last week, the Executive Director of Treasury’s markets group, Jim Murphy, said dealing with increasing flood insurance premiums is a “key issue”, but Government financial support “can only be justified in economic terms when a market failure can be clearly identified”.

“It is quite a complex matter as to whether the Government can go further than [it] has actually gone at this stage,” he says.

“Our view is that more work needs to be done to determine whether there is in fact a market failure… that would justify Government intervention in the form of a subsidy,” he said.

The complexity of any scheme and its budgetary implications would also need to be considered.

“The merits of such a proposal need to be fully explored through public debate and consultation,” Mr Murphy said. “Any proposal to subsidise insurance premiums needs to be weighed up against alternatives such as mitigation and land buybacks as well as issues around complexity, market distortions and cost.”

In its final report to the Government, the Natural Disaster Insurance Review chaired by John Trowbridge recommended the creation of an agency to operate a system of premium discounts supported by a funding guarantee from the Government.

An issues paper is due to be released on the concept by the end of this week. This will be followed by a consultation period.

Meanwhile, the period for industry responses to the Treasury’s consultation paper Reforming Flood Insurance: A Proposal to Improve Availability and Transparency ends on Friday.

The consultation paper outlines the Government’s preferred model for offering flood cover, which would require all insurers to offer flood cover in home building and home contents policies while allowing consumers to “opt out”.

Mr Murphy says Treasury is interested in the industry’s feedback on this “key proposal”.