Report rejects subsidised premiums in flood zones

A Productivity Commission report into climate change adaptation has argued against subsidised premiums for homeowners living in flood-prone regions, a finding that drew praise from insurers and the government but disappointed the head of a review into disaster insurance.

The commission argued underwriting risks would be costly, as households would have less incentive to reduce exposure to risk, and might not help households most in need, a view the government supported.

Insurance Council of Australia chief executive Rob Whelan said insurers welcomed the commission's report "which recognises the importance of the price signal that insurance sends about the need to adapt and reduce risk to ordinary households and businesses".

"Risk has to be priced appropriately," Mr Whelan said. Any effort to subsidise premiums "would mute that price signal".

However, John Trowbridge, who chaired the 2011 Natural Disaster Insurance Review, said the commission's findings, and the government's response, mean the issue of cost of insurance for those at risk from flooding had been left unresolved.

"The affordability problem has not been dealt with," Mr Trowbridge said.

Insurers and premium holders were keen to see how the report would address the soaring cost of insurance for flood-prone regions.

About 150,000 households live in regions deemed to be one-in-100-year flood zones. Many of those have seen premiums triple or more in recent years.

The insurance industry rates flood risks as among their most costly. Loss claims have again neared $1 billion after flooding in Queensland and NSW this summer, adding to even bigger losses in recent years.

Mr Trowbridge's review recommended temporary premium discounts for people who have lived in flood-prone regions for some time to help them adjust to the higher cost.

"We wanted to get the cover now and phase out the implicit support," Mr Trowbridge said.

Mr Whelan said the government was rightly shifting its focus to seeking cuts to stamp duties by the states, which can add as much as 40 per cent to the costs of premiums in NSW and Victoria. It is also stepping up mitigation spending in the form of levees and other construction works to reduce premiums - moves backed by the Productivity Commission.