The Institute of Actuaries of Australia (the Institute) today called for the creation of a temporary national insurance pool to subsidise premiums for high flood risk properties and to fund financial incentives for mitigation actions until mitigation strategies can reduce flood risks in the system to an acceptable level.
Commenting on its submission to the Natural Disaster Insurance Review (NDIR), Institute CEO Melinda Howes said, “While the Australian insurance market generally meets the needs of society, recent natural disasters demonstrate intervention in the market is necessary to assist consumers who are underinsured or not insured at all, particularly in the area of flood insurance.”
The Institute’s submission argues mitigation options aimed at protecting land and property from flood risks, such as revising building codes, planning rules, building dams and levies, and undertaking re-location and renovation of existing properties, are more likely to be cost-effective in the long term compared with the current approach of post-event funding of natural disaster-related losses.
“There are many pieces to the puzzle of natural disaster resilience and ideally insurance should be the last option. To ensure insurance is affordable and accessible, it’s vital appropriate mitigation action is taken by all stakeholders, including all levels of government, consumers and businesses,” said Ms Howes.
The Institute recommends the creation of a national insurance pool until mitigation action eliminates or reduces the community flood risks to an acceptable level, which is expected to take 10 to15 years. This pool could be funded by various options including taxpayer levies, a broad increase in premiums for all insureds or direct government funding.
“We recommend a temporary national insurance pool to provide subsidies to high risk insured parties rather than the government providing direct subsidies without pooling, and we recommend the subsidies be contingent on implementing risk mitigation measures,” explained Ms Howes. “Without this, risky behaviour such as continued building in high risk areas might be inadvertently encouraged.”
The Institute recommends a national insurance pool cover all “water off the ground” related loss to avoid confusion, and cover loss from both flood and actions of the sea, with a possible extension to other natural disaster risks if insurance affordability or accessibility is an issue.
In addition to a national insurance pool, the Institute recommends measures to better inform stakeholders, primarily through government sponsored national flood mapping to be made widely accessible to all stakeholders including all levels of government, businesses and consumers, as well as consumer information presented in a form which facilitates prudent behaviour.
“We strongly encourage the development of a single national standard for flood mapping in this country to support better risk mitigation efforts, risk pricing, risk exposure management and risk transfer mechanisms. Stakeholders should contribute to the cost of these maps, depending on use,” said Ms Howes.
The Institute also suggests the government investigate purchase and/or issuing of catastrophe bonds or similar financial instruments to fund natural disaster-related losses, which could operate so that private investors purchase fixed rate government bonds with a redemption value that reduces on the occurrence of a natural disaster event.
“While the recent natural disasters have resulted in tragic economic and personal loss to people and businesses around Australia, we now have an opportunity to create a sustainable national solution for flood and natural disaster resilience which ensures we are better equipped for the future,” concluded Ms Howes.