Prime Minister Julia Gillard has called on insurance companies to be generous in their interpretation of policies towards flood victims in Queensland and Victoria.
Heinrich Eder, the managing director of Munich Re Australia, says people who do not have flood insurance can not expect to be compensated for flood damage.
Reinsurers provide insurance cover for insurers.
Investment bank UBS estimates that 60 per cent of homeowners affected by the floods in Queensland may not be covered for floods in their insurance policies.
Mr Eder told the ABC that most people do not read the fine print in product disclosure statements and consumers should not be covered if they did not buy flood insurance.
"If you have a house and you have no fire insurance and unfortunately you have a fire then no-one would suggest your house should be paid [for] by the insurance companies."
"We have a large scale disaster and those who have bought insurance for flood, they will be compensated by those insurers, and those who haven't can't expect, compensation for a cover which they have not bought," he said.
He says insurance companies had been generous in the past towards policy holders.
"What people always suggest they will insist on the fine print or whatever, that is just to get everything a bit sensational, but it is not the facts," he said.
No flood cover
Less than half of 45 insurance policies surveyed by consumer group Choice provided insurance for floods.
The chief executive of the Insurance Council of Australia, Rob Whelan, says insurers will try to be flexible but cannot make exceptions for people who did not buy flood insurance.
"Unfortunately those who don't have flood cover, [if] it's not specifically allowed for on their policy, won't be covered," he said.
"That's a very unfortunate circumstance and we do regret that, but unfortunately that is the case."
Australian insurers have so far received around 12,000 claims worth $410 million from the floods in Queensland.
Reinsurers will cover the bulk of the payouts for local insurers because of reinsurance policies held by insurers such as Suncorp and Insurance Australia Group.
UBS insurance analyst James Coghill says that means the hands of the local insurers are tied when it comes to the fine print in policies.
"There is going to be less discretion made in ex gratia payments and we don't think there will be too many of those occurring," he said.
Flood definition
The flood crisis has prompted the Federal Government to look at the creation of a common definition of floods in insurance policies because many insurers do not provide coverage for floods from rivers and creeks.
Mr Eder says a flood definition would be an advantage and would not affect reinsurance.
"If we had a flood definition and flood definitions were suggested, it's always good to have because it gives clarity, what is covered and what is not covered."
But he warns a standard definition of floods in insurance policies in Australia will not guarantee cover.
"The guarantee of a provision of cover can only be that you can assess the risk and achieve a risk adequate price for the risk you are covering," he said.
In 2008, the Insurance Council of Australia proposed a common definition but that was rejected by the Australian Competition and Consumer Commission as confusing.
Chief executive Rob Whelan agreed there was no guarantee insurers would underwrite policies compensating for floods even if there was a common meaning.
"It's not the critical issue, the critical issue is around flood mitigation works and flood information around flood mapping," he said.
But the director of campaigns for Choice Christopher Zinn says a standard meaning was badly needed.
"There isn't a common definition in insurance policies of what is a flood and that results in people believing they have flood cover but the particular sort of water that inundates their place may not be covered by their particular policy," he said.
Flood maps
The ICA says inadequate information about flood prone areas is the reason why many companies do not offer flood coverage in Queensland.
Suncorp is the major insurer in the state and provides automatic flood coverage under its GIO brand after doing its own flood maps.
Brisbane City Council and some other regional councils in Queensland do provide flood maps on their websites.
Mr Whelan says the number of councils providing flood mapping data to the Insurance Council's flood database had improved.
"It does take resources, it does take funds to be able to do this and not all councils are in the position to be able to do it."
Insurance Australia Group offers flood coverage in New South Wales under NRMA Insurance but not in Queensland.
Expensive disaster
Munich Re says total payouts from the Queensland floods in December and January could run into the billions of dollars.
"They will be very substantial. They will be probably exceeding those costs for the hailstorms which we had in Melbourne and Perth, which were very substantial losses."
"I could well imagine we are talking billions of dollars," Mr Eder said.
The Insurance Council says the insured losses from the hailstorms in both cities stands at more than $2 billion.
The Newcastle earthquake in 1989 was the most expensive natural disaster in Australia with insurance claims of $4.3 billion dollars.
Rising premiums
The cost of reinsurance for local companies is rising because of the growing number of natural disasters and rising population in Australia.
Already Suncorp has had to pay an additional $120 million in reinsurance for the rest of the financial year.
Mr Eder says premiums for local insurers will go up because Australia has became more risky.
"The premiums, reinsurance premiums, have to be risk adequate in the long term to maintain sustainability. And if you have higher loss costs then, naturally, you have to increase prices over time."
"The frequency of large events has tripled in the last decade due to the effects of climate change, due to the effects of higher risk density, and exposure concentration," he said.
Another reinsurer, Swiss Re, says it is too early to tell if premiums would increase in the wake of the Queensland floods.
Morningstar insurance analyst David Walker says floods across the country means local insurers could pass on double digit rises in premiums to consumers.
"We think they will rise and they rise substantially. The insurers will seek to recover their claims costs from these flood events but they also seek to pass onto policyholders their rising reinsurance costs," he said.
James Coghill from UBS says insurance premiums for consumers have increased over the past few years and are expected to rise again the wake of the floods.
"This is an event that will enable insurers to price higher for longer," he said.