Establishing a government pool for flood threats to tackle steep premiums should not be the “default solution”, even after a positive outcome on cyclone risk, actuaries warn. 

A new Actuaries Institute paper says the cyclone reinsurance pool’s premium reductions prove that when risks are geographically concentrated and well understood, such government intervention can work.

“This may not be easily replicated for flood given the differing nature of this risk and the number of consumers exposed to these natural disasters,” says the paper’s author, Aon Reinsurance Solutions chief actuary Kate Bible.

“We must resist the urge for this to be a default solution, instead investing in mitigation and resilience strategies.”

Insured losses from natural disasters have averaged nearly $US100 billion ($152.81 billion) a year worldwide for the past 25 years.

Losses from “secondary perils” – floods, thunderstorms, droughts, wildfires and landslides – have gradually surpassed the primary risks: less frequent events such as hurricanes and earthquakes.  

The paper says the cyclone pool is an example of “desire by government to remove profit loading to create relief for the underlying consumer”.

Cyclone exposure is geographically focused and well modelled, and the pool has brought cost savings for high-risk homes and businesses.  

“A flood pool will be less effective: there is an insufficient number of consumers to share the cost of this natural disaster if only those who have some flood exposure are included in the pool,” Ms Bible says in the paper, Reinsurance Explained: A Pillar of Strength for General Insurers.

See ANALYSIS. 

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