The Federal Government says its new scheme will reduce insurance premiums for people living in flood and cyclone-prone areas of northern Australia.

The government this week announced a reinsurance pool to subsidise the cost of insurance coverage for cyclones and related flood damage. 

It is backed by a $10 billion government guarantee.

The government says its pilot program should reduce premiums by more than $1.5 billion for households, strata and small businesses north of the Tropic of Capricorn over the next decade.

Over 500,000 property insurance policies could be eligible to receive cover.

“Homeowners and businesses have been faced with crippling insurance costs, and in some cases, can't get insurance at all,” Prime Minister Scott Morrison said.

“It's not OK, and we're going to change that.”

Mr Morrison said the $10 billion government fund would drive down premiums by acting as “a floor underneath the insurance industry”.

“That will encourage more insurance companies into the market,” he said.

The plan has been criticised for a lack of detail, but the government says more will be known after the next election. 

Federal Treasurer Josh Frydenberg said the government is putting together a taskforce to work with the insurance industry on the final design of the reinsurance pool.

“More affordable insurance means peace-of-mind for hundreds of thousands of Australians across northern Australia, knowing that their economic livelihoods are protected,” he said.

The federal government also says it will pay $40 million for the North Queensland Strata Title Resilience Pilot Program to cut insurance costs for strata properties, also known as body corporate insurance.

That program is intended to subsidise the cost of cyclone risk mitigation.