Government may mandate home insurance

In an address to an Institute of Actuaries' seminar, on flood insurance, held in Sydney yesterday, McClelland said home-owners needed to take responsibility for insuring their property.

"The Australian tax-payer has become the default insurer of last resort to these natural disasters. If someone is going to build in an area where they are flooded out year in and year out, certainly, for the future at least, governments need to work together to mandate insurance," he said.

Last summer, there were over 118,000 insurance claims relating to natural disasters, at a cost of more than $3 billion to insurance companies. And 62,000 payments, totalling $72 million, were paid out of the government's disaster income fund.

McClelland said the problem of under-insurance and lack of coverage would be solved by removing disincentives to insurance and increasing the number of insurers.

"Part of the problem now is that the culture is so weighted against - or disincentivising - insurance that the pool of insurers is so low that the cost of insurance is high. I think we need to focus on expanding that pool of insurers," he said.   

But he conceded that if there were areas where insurers are unwilling to insure, the government - federal, state or local - might be required to step in and provide subsidies.  

The Attorney-General's calls for insurance industry reform were supported by Robert Whelan, CEO of the Insurance Council of Australia, who recognised the need for reform around consumer disclosure but also called for greater government action.

"What we need to see, in terms of government action, is in and around issues of land use, zoning, building standards, particularly mitigation works, and, of course, increased flood data, so that we can understand the potential risks that we face," he said.

Rade Musulin, chief operating officer of Aon Benfield Analytics, Asia Pacific, said Australia could learn from the "unintended consequences" that resulted from the US National Flood Insurance Program.

He blamed the program's subsidies for undermining the incentives for policy-holders to carry out mitigation strategies, and claims it encouraged coastal development in hurricane-prone areas.  

"Care has to be taken in crafting focused solutions because sometimes we can have unintended consequences when we design these programs. In the US, we saw a situation where the combination of some natural disasters and new technologies led to quite a bit of market disruption and government intervention," he said.   

The chair of the government's Natural Disaster Insurance Review Panel, John Trowbridge, agreed that individuals and businesses had to be encouraged to insure.

Trowbridge said: "Full cover offered by every insurer would be the desirable option, if it could be made to work. Then, you don't need hydrologists; you don't have arguments about storm or flood distinctions."

Trowbridge said that to achieve full flood cover a couple of problems needed to be solved: funding would have to be found to offer discounts on cover for high risk property; and there would have to be an agreed threshold for high and low risk properties.