Most home owners can't afford $8,200 flood insurance premiums as claims rise

Many home owners in flood-affected or flood-at-risk regions of Queensland and northern NSW have not taken out insurance against natural disasters, despite claims to the contrary by the Insurance Council of Australia (ICA).

The high cost of insurance premiums and social influences have been blamed as factors for the poor take-up.

To date, more than 3,000 properties have been affected by flood waters in Brisbane (Ipswich home below, courtesy of Flickr), with 9,800 insurance claims submitted in Queensland totalling $116 million and around 2,000 in NSW totalling $10 million, according to a report in the Australian Financial Review.

According to Allianz figures, as a result of the unaffordable cost of flood cover, 98% of NSW customers with a risk of flood of up to 1 in 49 years have opted out of cover, while the equivalent figure for Queensland is 95%.

The average flood insurance premium offered by Allianz in Queensland is $8,200 but can be as high as $19,000 based on the on the average home and contents sum insured of $385,000 in Queensland.

In NSW, the average annual premium $4,704 but can be as high as $24,000 based on the average home and contents sum insured of $388,500.

These figures are for flood cover only.

They dwarf total insurance premiums (excluding flood cover) of $860 in NSW and $1,250 in Queensland.

In September the Insurance Council of Australia released data showing nearly four in five Australian household insurance policies contain flood insurance.

However, this is predominantly standard flood cover, with just 21,000 out of 2 million policies included in ICA data opting for optional flood cover – presumably of the type offered by Allianz and other insurers covering home owners in high-risk areas.

Allianz spokesman Nicholas Scofield says the key barrier to providing Australians living in flood prone areas with insurance protection “has and always will be the affordability of flood insurance”.

“The main reason is that the insurance model is not best suited for events that have a certainty of happening, rather than just a chance of happening.

“For a house on a flood plain, it is a matter of when not if it will be flooded, so the flood premium starts with a simple formula that begins with the expected value of the loss divided by the anticipated frequency of loss.

“As result, premiums for flood cover for properties vulnerable to flood can be prohibitively expensive,” he says.

In its submission to the federal government's Natural Disaster Insurance Review, commissioned following the 2011 Queensland floods, Allianz proposed a reinsurance-style pool as mechanism to make flood insurance affordable.

“The review picked up Allianz's proposal in its recommendations, however, the government is yet to respond to this aspect of the review,” says Schofield.

The federal government review did not recommend mandatory purchase of flood insurance, leaving it up to home owners in flood-at-risk regions to decide whether they wish to bear the risk.

A research project carried out by Griffith University found that of 500 residents of south-east Queensland surveyed in 2012 (via telephone), more than 40% of respondents did not have flood insurance, or did not have home insurance at all.

The survey found that those respondents who know their homes were at high risk of flooding or who had experienced property damage in the 2011 were more likely to have flood cover on current policies, but did not find a strong positive relationship.

“Statistically, it is not conclusive to suggest that perceived risk and damage experience explain the tendency for non-insurance,” says Alex Lo, lecturer at the Griffith School of Environment at Griffith University, who carried out the research in The Conversation.

It also found that those who could afford the higher flood insurance premiums tended to insure against this disaster, but again there was no strong statistical relationship.

“Household income and affordability are not a good explanation either. The standard assumption does not always hold,” he says.

Lo says the motive to emerge from the study for taking out flood insurance was social influences

“The findings suggest that if the respondents believe that their family or friends would want them to insure, they tend to do so. Also if they believe that other people like them would buy flood cover, they tend to follow suit. The decision is predominantly socially motivated,” he says.

"Interestingly, such social factors are precisely what the Productivity Commission has identified but recommended not to deal with through government policy.

"Certainly there is something the market cannot do, for which the government should at least facilitate. Although it might not be appropriate for them to mobilise social influence directly, they should try to make sure the community has the capacity to spread the message. There is no excuse for the government to avoid addressing behavioural drivers. Governments have been using all sort of measures to encourage good behaviours and punish the bad ones.

"Local community organisations may help increase the voluntary adoption of flood insurance through word-of-mouth. Governments and the industry should support (financially) their efforts and harness the social forces they help to create," says Lo.

Submissions on exposure draft legislation aimed at making it easier for consumers to understand the terms of their insurance policies closed on December 12, led by financial services minister Bill Shorten.

Since the 2011 floods, the government has also introduced a standard definition of flood and a one page key facts sheet for all home and contents policies to help Australian consumers understand what they are covered for as well as launched the National Flood Risk Information Portal – an online “one-stop-shop for flood risk information”.