Massive floods raise questions about insurance and even mortgages

The sheer scale of the floods in Queensland and New South Wales has raised some very important questions quite aside from the long-term problems of repairing such massive damage.

One of the biggest is the problem of insurance, with the regularity of disasters threatening to make some areas uninsurable and potentially difficult to get mortgage finance as well.

The issue is that if catastrophic flooding or bushfires happen much more regularly than before as a result of climate change, then insurance premiums will quickly become unaffordable in those hardest hit areas.

More than 100,000 claims worth billions

While the costs of the current crop of floods has not yet been tallied, more than 100,000 claims have already been made and the best guess is that we are well on the way to $1.5 billion and potentially much more when you consider businesses, contents and cars as well.

Of course, insurance is a difficult beast to quantify and many flood claimants might already be facing problems with flood definitions and other fine print that will make successful claims difficult.

What is becoming clear is that the insurance or lending classifications of areas that are subject to a “one in 100-year flood’’ are quickly being overtaken by the reality that some areas are now flooding several times in a decade.

Just put yourself in the position of a bank or insurer of a property like that for a moment – would you consider giving a loan on such a property and what sort of annual insurance premium would make sense?

If there is a big chance of flood damage within 25 years, then lending would be difficult and insurance premiums would be close to unaffordable except for the wealthy.

Insurance can be required for a mortgage

Insurance and lending tend to go hand in hand with most lenders insisting on it before they will offer a loan.

So, this is a potential double whammy that could really slam some of the worst affected areas such as Lismore and Ballina.

If lending and insurance become much more difficult or expensive, then property prices are sure to fall.

So, what are some of the options if big swathes of Australian housing and businesses built on flood plains are going to become vulnerable to more regular floods due to climate change?

Well, the options are unpalatable but centre on two main areas – mitigation and insurance – with a side serving of much better flood preparedness and rescue.

Mitigation measures may need to become much more common

There have been some successful mitigation measures introduced around Australia but they may need to become much more prevalent if the damage from future disasters is to be lessened.

One was the reconstruction of Darwin after Cyclone Tracy way back in 1974 – together with much stricter building codes – and also the response to Cyclone Yasi in 2011.

Flood levees around Brisbane have been partially effective but much more would need to be done to protect wider areas.

Dam walls may also need to be raised to increase the ability to control river flows and more sophisticated measures used to release water early.

Flood mitigation measures have generally been fairly patchy and are expensive but essential if more frequent damage from floods is to be avoided – particularly in areas such as the northern rivers area of NSW.

In some cases, it may be that whole areas are deemed too flood prone to be habitable and houses will need to be relocated to higher ground.

The small Queensland town of Grantham is one good example – after devastating and deadly floods in 2011, many in the town took part in a land swap to build on higher ground.

Insurance pools may need to be changed

Insurance reform is a tough nut to crack but there have been some suggestions for reform in the wake of the latest floods.

In many flood prone areas insurance is already extremely expensive and these latest events will trigger a raft of premium increases or exclusions that will create a lot more premiums that will effectively be unaffordable.

In some ways this is how insurance is meant to work – properties at high risk of damage have consequently high premiums as a way of sheeting the risk home and making insurance pools workable.

Most of the reform proposals work by expanding the reinsurance pool from flood prone homes to a wider pool – effectively increasing insurance premiums overall so that the cost of insuring flood prone homes comes down.

Whether that expanded reinsurance pool is achieved through taxpayer contributions through governments or through private insurance the result is the same – the wider community pays more for their insurance or taxes so that insurance remains relatively affordable.

Could the cyclone reinsurance pool be expanded for floods and bushfires?

One of the proposals that has been suggested is to expand the model of the $10 billion cyclone reinsurance pool in northern Australia to avoid a market failure as insurance premiums become unaffordable.

As part of this there would be a common definition of flooding to avoid the current situation in which there are often disputes between insurers and claimants.

The northern Australia reinsurance pool was established in June last year and underwrites 880,000 residential and small business property insurance policies for the risk of cyclone and related flood damage.

While it is far too early to gauge the success of the scheme, which is claimed to be cost-neutral to the government, it is claimed to have halved some insurance bills.

Another possible solution would be to ask all policy-holders to contribute to a pool for natural disaster pay-outs, with a sliding scale for costs based on the risks of where people lived.

Or, policyholders could pay a direct premium to set up a flood reinsurance pool similar to a scheme in the UK which charges $18 a head to take part.

Politicians from both sides of politics have now urged the federal government to consider expanding the cyclone reinsurance scheme.

It should be noted, however, that widening insurance pools either through government decree or private distributions will see many people who are not threatened by flood paying more for their insurance.

Everybody wants to privatise their profits and socialise their losses but mandating it through insurance could cause some unrest for those who are footing the bill.