Premiums to soar if flood cover becomes mandatory: insurers

Investing in property, especially those near coastal areas or waterways, could become significantly more expensive if the government forges on with a proposal that mandatory flood cover be included in insurance policies.

The Insurance Council of Australia, which represents the nation’s biggest insurance companies, has rejected the proposal by the National Disaster Insurance Review estimating it will cost $5,000 to $7,000 in additional premiums to cover each of these homes against the risk of flooding.

It is on top of home and contents insurance premiums increasing between 20% and 40% in each state, mainly as a result of reinsurers increasing the cost of the cover they proved to insurers due to the recent spate of natural disasters.

Global reinsurer Munich Re estimates the Queensland and Victoria floods in December 2010/January 2011 resulted in insurance losses of $2.4 billion, while losses as a result of the Japanese tsunami are estimated at about $28 billion.

Century21 chairman Charles Tarbey sees a flow on effect if flood cover becomes mandatory.

"The issue is that investors have to cover costs, and will likely pass these additional insurance costs on. 

"If buyers find these premiums to be prohibitive they may not purchase properties in these areas, which will have an impact on the availability of rental stock, and we already have a shortage in many areas as it is,” he tells Property Observer.

For those who already own investment properties in these areas, Tarbey says rental rates will likely increase, “however the cost of owning the property could cause the investment to underperform.”

The proposal comes six months after the Queensland floods, with the state’s reconstruction authority reporting that hundreds of people might not be back in their homes by the start of the 2011 wet season.

Head of the reconstruction authority, Major-General Mick Slater, says 860 of the 2,500 damaged homes in North Queensland have been repaired.

In its response to the proposal from the National Disaster Insurance Review, the ICA has repeated its calls for a focus on risk mitigation strategies.

“Risk and premiums are inextricably linked and essentially we are arguing that the risk element needs to be attacked,” says ICA chief executive Rob Whelan.

“Let’s reduce the risk by having appropriate mitigation and then the cost of insurance will decline,” he says.

In illustrating its position, the ICA compares the role of flood insurance to that of comprehensive vehicle and third-party car insurance:

“The community and government do not expect that cheaper or subsidised car insurance for at-risk drivers will stop accidents on the road occurring. Indeed, reducing the price signal for hazardous driving activity in this instance may have the opposite outcome by removing one of the hip-pocket consequences of risky driving behaviour. Affordable car insurance cannot substitute for risk mitigation activities that lower the occurrence of accidents.”

The peak insurance body estimates that 7% of residential property in Australia is exposed to predictable and repetitive flooding, causing an average of $400 million to $450 million in damages per year.

It claims the private insurance market is working when it comes to dealing with flood risk, with 85% to 92% of submitted claims accepted by insurers.

“Flood insurance has been widely available for every property in Australia since 2006.

“Market provision of cover is accelerating, with 54% of policies selected by consumers currently providing cover, [and] this is expected to exceed 84% in the next 18 months.

“There is no issue with availability.”

The ICA has also rejected proposals for a government flood pool, which it says will raise the cost of living.

“A new pool will require further government bureaucracy and complexity and will increase the cost of living for ordinary Australians.

“The majority of insurers do not support the creation of a system that will pool flood premiums in government hands, preferring instead a model targeting those in need of premium support, with direct subsidies,” it argues.

However, the ICA say there is room for improvement “through market reforms and government action on risk mitigation and community support”.

“This is the true community problem that requires reform by government to achieve lasting solutions, without which any government or private market flood insurance solution is not sustainable over the long term,” the ICA says.

The proposals set out by the NDIR, chaired by former APRA board member John Trownbridge, do include proposals to mitigate flood risk.

These include a commitment to ensuring a measureable reduction in the number of flood-exposed residential properties in each LGA is achieved each year for the next 20 years.

Other government proposals include:

• Providing public access to all publicly funded flood mapping conducted in Australia, followed by a program to harmonise Australian flood mapping practices to be aligned with world’s best practice.
• Through COAG, implementing legislation ensuring flood risk disclosure, to provide all property owners and tenants with flood risk information during title transfer or development application, when a lease is entered into for occupation or use of a property and annually to the resident and to the ratepayer for the property.
• Implementing a national policy for land use planning whereby no residential property is constructed on at-risk land, without enforcement of development controls that reduce the risk to less than a one-in-100-year type flood event.