The introduction of standard flood definitions in insurance policies, supported by a central insurance pool, may prove to be the best solution to the age-old problem of dealing with flood risk, according to global insurance broker, Marsh. The pool would provide reinsurance protection to insurers and be funded through a shared-responsibility arrangement between government and industry.

“It’s clear that the insurance industry in Australia, to this point, has not been able to develop clear solutions that deal with the lack of availability and lack of clarity surrounding flood coverage for policyholders,” said John Clayton, CEO of Marsh in Australia.

“Insurers are requesting better flood maps but even if the quality of data improved, insurers may well be reluctant to provide coverage in flood-prone areas. As for changing planning laws, whilst this change might help mitigate the exposure of new buildings, the fact is that there are thousands of existing commercial and residential properties that will remain in flood-prone areas, including some high-density parts of the Brisbane CBD.

“The reality is that recent events have really served to highlight a problem that has existed for decades and a shift in thinking is needed to improve the prospect of better flood protection in the future,” said Mr Clayton.

Marsh is supportive of a government-sponsored insurance pool that essentially provides appropriate reinsurance protection to domestic insurers when they underwrite flood risks. Insurers would access the reinsurance by passing on a percentage of the premium they charge customers when selling their standard insurance policies. Each insurer would have the capacity to make its own decision about the level of risk it wishes to pass on to the government pool, the purpose being to limit its exposure.

“Standard flood definitions would form an important part of the solution. Consideration also needs to be given to whether flood coverage should be mandatory in policies – in order to make the pool viable - in the same way that insurers are required to provide protection against terrorism risks with the support of the Commonwealth’s terrorism reinsurance pool,” said Mr Clayton.

“This could be a sustainable solution that would provide greater clarity and protection for policyholders, without unnecessarily taking away healthy competition in the insurance market. Insurers would still be free to price flood risk in a competitive market place.

“Clearly, feasibility analysis would be required to determine the precise settings of such a pool but we see clear potential, including the opportunity to embrace some innovative mechanism to create a commercially viable solution.

“The insurance industry in Australia, of which Marsh and other insurance brokers are a part, has had a good track record in dealing with other natural perils, like bushfires, earthquakes, cyclones and severe storms. We now need to build on this track record by developing a balanced response - to the lack of available flood coverage - that addresses the interests of both policyholders and insurers,” he said.