As the recovery effort continues in the wake of the Queensland floods, a fierce debate is raging over exactly how to finance what has been described by some as the biggest natural disaster in Australia’s history.

According to reports, some politicians are proposing introducing a flood levy across Australia to help cover the costs of flood damage. Another idea on the table is the establishment of a special fund, similar to the one set up in New Zealand following last year’s Christchurch earthquake.

Australia’s debate about the role of the private and public sectors in the wake of disaster comes as the United States looks at ways to reform its National Flood Insurance Program (NFIP), including privatizing part or the entire 40-year old program.

Two key concerns surrounding the NFIP are that its rates that do not accurately reflect the cost of risk and many do not purchase the coverage.

In The Australian, an op-ed by Rob Whelan, chief executive of the Insurance Council of Australia (ICA) says the ICA welcomes debate on the development of a standard definition on flood insurance, but warns that a flood levy will hurt existing policyholders and deter others from buying comprehensive flood cover:

If the proposed levy were to be applied to insurance policies, it would not only add to the cost of premiums but unfairly punish existing policyholders.

Imposing additional taxes in the form of levies on policyholders is not the way to encourage consumers to take out adequate insurance. Only a small percentage of the population lives in flood-prone areas. Is it fair and reasonable for the entire population to fund a small few?”

Whelan goes on to note that the insurance market in Australia is competitive, and that if insurers are provided with the necessary data the industry will respond by developing new and innovative flood products.

Countries around the world have taken varied approaches in their provision of flood coverage. The Queensland floods underscore the point that there are different points of view, even among insurers themselves, on how to handle the flood peril.

As forecasters warn that the year 2011 is poised to be the year of the flood, it will be interesting to see how recent high-impact events influence the debate on flood insurance.

Current estimates from the ICA put the cost of insurance payouts in Queensland alone at $1.2 billion due to the recent floods. Some estimates have put the insurance bill as high as $6 billion.

The ICA estimate does not include industrial or mining claims, nor claims as a result of ongoing flooding in the state of Victoria.

Check out a series of briefings on the impact of the Australian floods from law firm Norton Rose.

Check out I.I.I. facts and stats on flood insurance.