When Katie Melton opened a letter from her insurance company six weeks ago and read how much she’d have to pay to insure her Queensland home this year, the 29-year-old, stay-at-home mother was stunned.

“I cried,” she chuckles, a bit embarrassed by her reaction. “I was devastated. I rang them up and cried, but they couldn’t do anything for me.”

The house and contents insurance on her home at Karalee, a suburb near Ipswich in the southwest of the state, had increased from about $800 last year to $2,800.

“Who can afford $3,000 a year for insurance? It’s ridiculous,” she says.

About $1,400 of that premium was the cost of covering the house and contents for risk of flood damage. And Katie and her husband, Christian, know they need flood insurance. In January 2011, their two-storey home flooded to its roofline, which caused $90,000 worth of damage that was not covered by their previous policy.

When Katie started ringing around to find a better price, the news only got worse.

The very next call produced a quote for $7,000. That would have put quite a dent in Christian’s take-home pay as an electrician.

Soon, however, paying that sort of premium might seem like a pretty good deal for families living in flood-prone areas of coastal Australia, or in our fertile river basins.

In the past few months, stung by the backlash from customers who discovered after the recent floods that their policies didn’t include damage by flood disaster, a majority of insurers have begun to offer flood cover as a standard item in house and contents insurance, along with the basics of fire and theft. At the end of 2006, about 3 per cent of Australians were covered for flood, according to the Insurance Council of Australia; by the end of 2012, 85 per cent of policies will have flood coverage.

In order to offer that breadth of coverage, the insurance companies have had to commission detailed flood maps showing exactly who is vulnerable to flooding, how badly their properties are likely to flood and how often the greater your risk, the higher your premium.

Getting that data together and pricing the risk has consumed the industry for the past year and a half. It’s been a boom time for cartographers as they undertook the biggest charting exercise in a generation.

Street by street, these mapmakers have set about measuring the height of every square kilometre of land in our cities and major towns, nationwide. They’ve used satellite images to do it, they’ve sent out a squadron of light planes armed with radar and cameras, and they’ve employed highly sophisticated computer modelling.

The maps they have produced are forensic documents.

Not only are they more detailed than anything drawn up by government, they are in many areas the first flood maps ever produced. At the time of last year’s devastating floods in Queensland — some 168 years after Ludwig Leichhardt began his expeditions of discovery through there — two-thirds of that state had never been mapped for flood.

Now, in their glass-and-steel corporate offices, insurance executives are able to unfurl charts pinpointing individual properties, with a rainbow of colour-coded dots identifying the various levels of risk.

The Global Mail viewed half a dozen of these highly commercially sensitive flood maps. And one industry source, who asked not to be named in this story, has taken the extraordinary step of releasing two flood maps to The Global Mail for publication. For the first time, we can see exactly what the insurers see.

Two things strike you when you look at these maps: the vulnerability of so many Australian householders, and the towering stupidity of the local and state governments, which blithely approved such development.

The scale of the problem leaps out from these documents in the form of dense patches of overlapping red dots—highlighting the homes at highest risk—covering whole neighbourhoods in coastal and river towns. What’s not so obvious is that many of the cheaper housing estates were built in low-lying areas.

It’s staggering to realise that — as a result of this detailed mapping — the insurance companies have a far better idea which properties face the danger of flooding than the occupants do.

Photo by Patrick Hamilton

Katie and Christian Melton with son, Hamish.

Almost an entire housing estate in Tweed Heads, on the New South Wales Tweed Coast, is inundated with red dots, as is much of the historic New South Wales coastal town of Ballina. The inland Queensland township of Roma is the same, but in Roma’s case, it’s not news to residents; they’ve been flooded three times in three years. Another bad risk lies in the Sunshine Coast hinterland amid those “back-of–the-dunes” housing estates. God help them if it’s raining and there’s a king tide at the same time.

Built very close to the coast or major waterways, none of these towns has enough flood mitigation – that is, levees or dams – to hold back rising waters. And, by and large, local councils in such areas have not dictated strict building standards to protect home owners against the effects of the almost inevitable floods. You might conclude some of these houses should never have been built at all.

All over eastern Australia, people like Katie and Christian are now trapped.

Their homes — about 450,000 houses, along with 100,000 home units — are among the dwellings afflicted with red dots. It’s as if these homes have been quarantined with a cruel and chronic illness. With the value of their flood-affected properties way down, the owners can’t afford to sell. But soaring insurance premiums make it very expensive for them to stay.

“We thought we were buying a house in a good area,” says Katie, explaining that they were told the catastrophic floods that occurred in 1974 — the largest of the 20th century, which flooded 8,000 homes in Brisbane alone — only inundated the yard of their home, not the house itself. “The house wasn’t cheap when we bought it. We bought an acre, and our land value has gone down substantially. At least $100,000.”

While Katie was surprised to learn her house has been deemed so vulnerable to flooding, the insurance industry is awash with such newfound knowledge. After their frantic year of map-making and risk assessment, insurers are ready to show us what they know and many of us still don’t: how many Australian homes and businesses lie in the path of potential future water damage.

“It’s a nonsense” – The flood fiasco

“Let me give you a statistic,” says Andy Cornish, chief executive of direct insurance at IAG, the parent company of NRMA insurance.

As he sits in a meeting room on the 24th floor of IAG's Sydney corporate offices, he reaches for a briefing paper, which compares the amount spent to prevent floods in Australia with the enormous cost of mopping them up.

“Thirty-odd million,” he says. “[That’s] what the government spends on mitigation every year.”

(In fact, a Productivity Commission report shows annual federal government spending on disaster mitigation has fallen to just $26 million dollars in 2010-11. There was no additional money for flood mitigation in the 2012 federal budget, either.)

“Yet they provide these massive amounts of handouts in emergency payments after [a flood].” He says the total figure for all emergency assistance to Australians since December 2010 is in excess of $800 million.

“That,” Cornish says bluntly, is “a nonsense”.

When Cornish first came to Australia from the UK in 2009, the issue of flood was barely on the Australian agenda. Like most insurance companies, he says, his didn’t automatically offer flood insurance across Australia as part of its standard policies because they had never been able to gather the data needed to calculate the precise risk of flood in every part of the country. And, after about a decade of drought, it wasn’t as if the customers were complaining. As people struggled with water restrictions in their cities and towns, it’s fair to say most didn’t see the value in expensive flood insurance.

Then the drought broke. A series of flood or near-flood events up and down the east coast culminated in the disastrous Queensland floods of late 2010 to early 2011. So many insurance companies and their clients were caught out, and caught up in trying to minimise their losses.

When claims were not paid, customers railed against the reasoning of companies. The distinction insurers drew between flash flooding (that’s water coming down from the sky) and what they call riverine flooding (water rising up from rivers and creeks) drew particular ire.

“The absence [of comprehensive flood cover] was something that I considered completely unacceptable,” says Cornish, a sentiment that was shared by the federal government which held an inquiry late last year into how to “fix” flood insurance. (Legislation is now before the Federal Parliament to create a standard definition of flood and require insurers to send policyholders a statement of key facts, clearly indicating what is and isn’t covered by their policies.)

“I made it our number one priority to be able to provide flood cover protection for consumers in Australia and I changed the priorities of the organisation to focus on protecting consumers with flood cover and giving a flood premium to everybody,” says Cornish.

Photo by Dave Hunt/AAP

The town of Ipswich, west of Brisbane, on January 12, 2011

That wasn’t going to be as easy as it might have seemed to the English boss.

For many years, insurance companies have struggled to get local councils to release their flood maps. The Insurance Council of Australia began gathering what there was from local councils as early as 2006, to put together a National Flood Information Database. It took about a week to get the data from Western Australia, South Australia and Victoria. New South Wales took longer, and Queensland stonewalled, perhaps because at least two-thirds of the local government areas in these states had never been charted for flood. (It seems that after the young Prussian Ludwig Leichhardt disappeared on his final expedition, no-one had followed up with more detailed ground work.)

The Queensland floods in the summer of 2010/11 changed everything. By the time the Brisbane mud army had mobilised — those thousands of volunteer citizens who helped clean up the River City — councils, particularly those in Queensland, were rethinking their approach.

“We were able to get the data much more easily,” says Cornish.

Had the councils been deliberately withholding information in the past? “I wouldn’t want to suggest anything. The facts are that … we were able to get hold of information that in the past had been a little tricky to get hold of, for whatever reason.”

Armed with as many maps as were available — detailed for some places, out of date for others – the NRMA spent millions of dollars scrambling to fill in the gaps and have maps made of uncharted territory. It then translated the data about floods in different areas into the pricing of flood cover for its three million customers.

Its competitors were doing the same: each racing to produce more accurate maps than their rivals because they knew to underestimate the risk would mean they could be out of pocket by hundreds of millions of dollars in damages claims. To overestimate the risk, would mean their premiums would be uncompetitive.

In January this year, the NRMA started mailing out the new premiums.

Flood coverage would now become a standard part of NRMA’s home and contents policies and most customers would not be able to opt out of such coverage, even if it was expensive, as Cornish explains.

“[In the past] customers felt they were protected [against the cost of flood damage] by storm cover. But storm [cover] only protects them in part from water damage. And the confusion that’s created in the past has been unhelpful,” he says. “It’s absolutely essential that there is certainty. It’s a commercial decision that I’ve taken that there be no ambiguity.”

Many other leading insurers have done the same thing. For example, Suncorp, which led the industry by offering flood coverage as standard from 2006, also doesn’t allow customers to opt-out of its brand-name product, Suncorp Insurance.

This has resulted in significant price increases for householders, businesses and industries occupying the seven per cent of Australian land which the Insurance Council of Australia estimates is exposed to some level of flood risk. Hardest hit are those who live or make their living on that 2.8 per cent of land that is severely flood prone.

The specific increases come on top of general increases in insurance premiums, as a result of the large number of natural disasters in the Asia-Pacific region in 2011. Between New Zealand’s earthquake, Thailand’s floods, Japan’s tsunami and Australia’s $5 billion horror year of floods, bushfires, cyclones and hailstorms, re-insurance for the local insurance companies – that’s the cost of insuring the insurers themselves against big losses – has increased significantly.

Cornish cautiously admits that the resulting premium increases have left some customers “surprised”.

He says 96 per cent of NRMA’s Queensland customers will receive flood cover for less than $200. “Those that have got no flood risk aren’t charged for it. They’ll be charged zero,” he says. But one per cent will be paying a premium above $1,000, and 0.3 per cent will see premiums at or above $3,000.

“I think the community has been aware that they have got a potential flood risk, but perhaps they’ve been surprised at the severity of that risk. And so in some states [they’ve been] surprised at the level of premiums we’ve had to charge them.”

Figure 1

A look at the maps

All the insurance companies The Global Mail spoke to for this story were reluctant to release the flood maps that inform their premiums. No-one, it seems, wants to risk their competitors discovering what they’ve discovered.

The two maps The Global Mail has been given were drawn up by a major national insurance company and they show the level of flood risk in two areas in Queensland.

When you look at them you see precisely who is at risk and who isn’t.

“It just highlights the extent to which we’ve probably built houses in the wrong spots,” says the industry insider who gave us the maps. “Everything’s easy in hindsight, but there are houses here that have fairly significant exposures, and that’s the reality for us. We’ve built them there.”

The map in Figure 1 shows the flood risk for the long-established Brisbane suburbs of Kelvin Grove in the inner west, moving along the River to Hamilton and Bulimba in the east – all areas affected by last year’s flood.

The scariest parts of the maps are shaded blue, and show the probable points of maximum flood. While no insurance companies are prepared to discuss whether they factor in the likely impact of climate change, rising sea levels or more extreme weather events, these new maps gives them the capacity to do so.

“We’re certainly looking much more at what we think the risk exposures are around water and water damage,” says the industry expert. “Increasingly, if we see more and more weather events — whether they’re driven by climate change or not — [these] will be factored into the costs of providing insurance. No,” he says, correcting himself. More extreme weather events “are being factored in to the cost of providing insurance.”

As mentioned before, the red dots on the maps indicate the most vulnerable properties. More specifically, the red dots show those that would go under in a one-in-20-year flood. Not every property is covered on each map; indications are confined to the areas in which this national insurer has policyholders. Yellow dots represent those properties at risk during a 1-in-20- to 1-in-100-year flood event.

The green dots represent those which would be at risk only from a one-in-100-year flood. And while the odds for those properties marked with green dots might seem pretty good, keep in mind that a one-in-100-year event describes an average occurrence; for example, Brisbane has had two such floods since the early 1970s. To put it another way, a green dot means those properties have a 1 per cent chance of flooding in any year.

“Mother Nature being Mother Nature, that [one-per-cent event] can happen any time,” says the industry expert. “You can have three once-in-a-lifetime storm events in three years. That’s a reality,” explains our source.

These maps put paid to the notion of the “Wivenhoe effect” — the idea that the construction of the Wivenhoe Dam in 1984 protected southeast Queensland from future flood events.

“The perception [in Brisbane] was [the risk of flood] was all fixed with Wivenhoe. But what’s evident is, if Wivenhoe fills up, the water’s got nowhere to go. You have to let it out. And in that rain event, in those circumstances, Wivenhoe wasn’t sufficient mitigation. That’s what it showed.

“So when the big events hit, the really big events hit, it tests and highlights the decisions you’ve made about how much mitigation to invest in. Every time you make those decisions, you’re rolling the dice around your ability to mitigate the event,” he says.

How then do insurers figure out how much to charge to protect properties marked with red dots?

Once again, our industry expert explains: “Insurance companies are looking at the price based on the likelihood that they think the property is going to flood and how bad they think the damage will be when it floods.

“So, at the risk of gross over-simplification, you form a view about the likelihood of a one-in-20, one-in-50, one-in-100 flood event. Then you work out how high is the flood going to go relative to the property — what the maximum height will be. For instance, it might only flood to half a metre, versus three metres. That’s a completely different level of damage. And that gives you some clues as to the cost of the damage associated with that height will be. Those two things are reflected in the cost [of the premium].

“If it’s a one-in-a-hundred-year event, you want to get one per cent of the [likely cost of damage caused by a flood] back every year [in premiums],” he says. “A one-in-20- year event, you want to get five per cent back.”

What’s clear from these calculations is that insurance companies are no longer spreading the cost of covering risky customers across their whole customer base: people living on the hill are not subsidising those living down beside the creek.

“Families want a competitive price,” says our source, “and they’re not prepared to subsidise other people. [They ask] ‘Why would I subsidise someone else?’”

Now, look at the next map, Figure 2 — showing lower socioeconomic areas around the Bremer River near Ipswich — and it becomes obvious that often the people who most need flood insurance who’ll be least able to afford it.

It’s an issue that concerns NRMA’s Andy Cornish.

“Affordability is a massive issue for these people in high-risk areas. Does it mean there’s a failure of the insurance industry? No. Does it mean that society needs to do something about it? Yeah. There has got to be a community responsibility for that, because we can’t ignore the risks these people are under.”

Figure 2

Stuck in suburbia

Katie and Christian Melton think the Government should buy back houses like theirs, given they were not adequately warned of the flood risk when they bought it.

But they’re not counting on that.

After five weeks spent calling around insurance companies, Katie realized the initial quote for $2,800 was the cheapest on offer. So, they’ve opted instead to insure just their house (the building alone) for flood, at a cost of $1,600. And they’ve started saving to buy a new home, Katie says, somewhere “high and dry”. In the meantime, they’ve also thought through a strategy for how they’d save their possessions should the river break its banks again.

“Yes, we’ve thought about it. We’d get everything out we possibly could. The hard thing with a flood is that you couldn’t use a ute because it would be raining and everything would just get wrecked anyway. We’d have to get our hands on a truck.”

With those sorts of conversations going on in Australia’s suburban living rooms, Andy Cornish says it’s time all Australian governments finally tackled with the vexed issue of flood risk.

“My fear is that this is a problem that might diminish as we go into further dry seasons. This is something that will be forgotten in 12 to 18 months time unless we decide to do something about it now.”

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