Chapter 1 Introduction
Referral of the Bill
1.1
On 24 November 2011 the Selection Committee referred the Insurance
Contracts Amendment Bill 2011 to the committee for inquiry and report.
Origins and purpose of the Bill
1.2
During 2010-11 there were a significant number of natural disasters. In
particular, severe floods affected large areas of Queensland, New South Wales
and Victoria. These floods resulted in loss of life, social upheaval and
significant financial costs. The aftermath of the flooding revealed that a
considerable number of people had inadequate or no insurance cover. Many
consumers were confused about what is covered in insurance policies and, in
particular, the extent to which policies insure against flood. The Natural
Disaster Insurance Review (NDIR) stated:
The fact that all home insurance policies cover storm damage
including related water damage but many do not cover flood damage, which
distinction is seen as arcane and artificial by many, led to a community
backlash against insurers during 2011 and considerable distress, financial loss
and disillusionment for many insured homeowners.[1]
1.3
On 5 April 2011 the Government released a consultation paper Reforming
flood insurance: Clearing the waters. The purpose of the paper was to
engage the community in suggesting improvements to the regulatory framework and
other aspects of Australia’s insurance market.[2] The Explanatory
Memorandum (EM) states:
The paper contained two key proposals designed to improve
clarity for consumers in relation to insurance policies and in particular, the
cover provided for various types of flood, namely, a standard definition of
flood and the Key Facts Sheet (KFS) to outline the key information
in relation to home building and home contents policies. The Insurance
Contracts Amendment Bill 2011 (this Bill) implements these proposals.[3]
1.4
The then Minister for Financial Services and Superannuation, the Hon
Bill Shorten, MP, stated that ‘these catastrophic events highlight the
importance of insurance and making sure that individuals, families, communities
and governments have effective insurance cover in place to guard against and
recover from disasters.’[4] Mr Shorten, in his second
reading speech to the Insurance Contracts Amendment Bill, stated:
This bill delivers on the government's commitment to provide
consumers—everyday individuals, modest hardworking families and striving
Australian enterprises—with a better understanding of what is included in their
insurance policies and in particular, the extent to which policies provide
cover for flood and what cover for flood actually means.[5]
1.5
The Minister stated that the Bill will implement these two measures ‘with
the aim of helping consumers make effective decisions in relation to their
insurance needs, through increased clarity and accessibility of key
information.’[6]
Standard definition of flood
1.6
Schedule 1 of the Bill amends the Insurance Contracts Act 1984
to introduce a legislative framework for a standard definition of the term
'flood' for home building, home contents, small business and strata title
insurance policies. The Minister, in his second reading speech, stated:
The definition is designed to provide a clear and easily
understandable meaning for what is commonly known as riverine flooding, namely
the covering of normally dry land with water that has escaped or been released
from the normal confines of any lake, river, creek or other natural watercourse
or alternatively, any reservoir, canal or dam.
A standard definition of flood will reduce consumer confusion
regarding what is and is not included in insurance contracts. It will also
avoid situations where neighbouring properties in the same street, affected by
the same flood event, receive different claims assessments because the policies
covering them use different definitions of flood.[7]
1.7
The current problem with flood definitions is that there are various
sources of inundation that can cause damage to property. The Insurance Council
of Australia (ICA) has suggested the risks can be divided into three broad
categories which are summarised below:
n A. Stormwater/rainfall runoff:
These terms refer to high intensity, short duration storms producing localised
flooding. Most insurance policies (but not all) cover this risk. Some insurers
also use the term ‘flash flooding’ with similar intent.
n B. Riverine/inland
flooding/flooding: Inundation caused by watercourses or catchments
overflowing their banks due to long duration rainfall over large areas. Some
insurers provide cover for this risk, but many exclude it. Whether included or
excluded, the definitions of this risk can vary greatly.
n C. Actions of the
sea/sea level rise/storm surge: Inundation caused by movement of
seawater. Few insurance policies cover this risk.[8]
1.8
The Natural Disaster Insurance Review stated:
In the wake of the recent floods in Queensland and Victoria,
a number of policyholders have reported that they were surprised that their
policies did not cover the type of inundation that occurred. The majority of
these cases relate to policies that do cover category A but exclude cover for
category B (riverine flooding).[9]
1.9
A comparison of the proposed law versus the current law is shown in the
following table.
Comparison of key features of new law and current law
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Insurance providers will be required to
use a standard definition of the term flood (and all related terms) in all
HBHC, small business and strata title insurance policies and their supporting
documents. The term flood will be defined in regulations.
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Currently the term flood is not defined
in the ICA resulting in insurers defining the term in different ways.
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Source Explanatory
Memorandum, Insurance Contracts Amendment Bill 2011, p. 8.
1.10
The Treasury noted that the Bill does not itself mandate the use of a
standard definition of flood. However, it does ‘require the use of a particular
definition of flood, if the word flood is used in an insurance contract.’[10]
Key Facts Sheet
1.11
Schedule 2 of the Bill amends the Insurance Contracts Act 1984 to
provide a legislative framework to allow regulations to be made to introduce a
requirement for insurers to provide a key facts sheet outlining key information
in relation to home building and home contents insurance. The Minister, in his
second reading speech, stated:
The key facts sheet will enable consumers to access key
information in relation to home building and home contents insurance policies
in a concise and easy to understand format. This will assist consumers in
making more appropriate decisions when entering into these types of insurance
contracts.
In order to ensure consumers are able to effectively utilise
the key facts sheet, insurers will be required to provide this document to
consumers as soon as they have requested information on the particular policy.[11]
1.12
The Minister concluded that the ‘introduction of the key facts sheet
will make the purchase of home building and home contents policies simpler for
consumers, assisting them to compare policies with a consistent document, and
facilitate more effective and informed decision making.’[12]
1.13
Currently, insurers are required to give consumers a Product Disclosure
Statement (PDS) if they offer or issue an insurance policy. The EM noted that
‘PDSs can be lengthy, making it difficult for consumers to access key
information about the features of the policy, including the inclusions and
exclusions.’[13] The EM stated:
The KFS is a one page document that will summarise the key
information about a given HBHC insurance policy, which may include:
n what is covered;
n what is not covered;
n the cooling off
period;
n what type of cover is
offered under the policy; and
n an explanation of how
the KFS is to be used.[14]
1.14
A comparison of the proposed law versus the current law is shown in the
following table.
Comparison of key features of new law and current law
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|
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In addition to existing disclosure
requirements for home building and home contents insurance policies contained
in the Corporations Act 2001 (Corporations Act), insurers are required under
the ICA to provide a KFS, which outlines the key information on what is and
what is not covered in respect of the particular home building, home contents
or home and contents insurance policy at the request of a consumer.
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The existing disclosure obligations in
the Corporations Act require an insurer to disclose information in relation
to the terms and risks associated with the insurance policy in a product
disclosure statement.
There is no disclosure requirement in
the ICA for a document containing a summary of the key information to be made
available to consumers for home building and home contents insurance
policies.
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Source Explanatory
Memorandum, Insurance Contracts Amendment Bill 2011, p. 14.
1.15
A draft key fact sheet used in the Reforming flood insurance –
Clearing the waters consultation paper is shown on the next page.
Draft Key Fact Sheet: Reforming flood insurance – Clearing the waters
Source Reforming
flood insurance – Clearing the Waters, Consultation Paper, April 2011, p. 11.
Date of effect
1.16
The amendments in this Bill will take effect from the date of Royal
Assent. The regulations will commence two years after they are made in respect
of each of the measures (the standard definition of flood and the KFS).
Release of draft regulations
1.17
On 9 December 2011 the Minister released draft regulations implementing
the standard definition of flood in insurance contracts. The draft regulations
for the key fact statement are expected to be released early in 2012.[15]
1.18
Proposed section 29D of the draft regulations provides the following
meaning of flood in prescribed contracts.
Proposed section 29D Meaning of flood in prescribed contracts etc.
(1) For
paragraph 37B (2) (a) of the Act, the word ‘flood’ means the covering of
normally dry land by water that has escaped or been released from the normal
confines any of the following:
(a) a lake (whether or not it
has been altered or modified);
(b) a river (whether or not it
has been altered or modified);
(c) a creek (whether or not it
has been altered or modified);
(d) another natural
watercourse (whether or not it has been altered or modified);
(e) a reservoir;
(f) a canal;
(g) a dam.
1.19
The Minister noted that the draft regulations ‘follow the announcement
by CGU Insurance to extend flood coverage based on these regulations, to all
home, contents and landlord policies nationally.’[16]
1.20
The Minister commented that the ‘proposed definition is consistent with
the recommendation of the Natural Disaster Insurance Review, that the
Government introduce a standard definition of ‘flood’ in the form proposed in
the Assistant Treasurer’s Reforming Flood Insurance: Clearing the Waters
consultation paper.[17]
Treasury Consultation
First round
1.21
On 5 April 2011 the Government released a consultation paper Reforming
flood insurance: Clearing the waters, with submissions closing 13 May 2011.[18]
The paper aimed to engage the community in suggesting improvements to the
regulatory framework and other aspects of Australia’s insurance market.
1.22
The paper acknowledged that:
Following the recent experience, insurance industry and
consumer representatives have made some suggestions for improving the
regulatory framework and other aspects of Australia’s insurance market. The
Government is giving a high priority to progressing reforms aimed at improving
the insurance policy framework... [19]
1.23
The paper proposed that insurance contracts covering flood damage would
follow a standard definition of flood. It also proposed a Key Facts Sheet (KFS)
to outline the key information in relation to home building and home contents
policies.
1.24
Treasury received 13 submissions in response to the paper. There were
12 public submissions and 1 confidential. Submissions are available at:
http://www.treasury.gov.au/contentitem.asp?ContentID=2039&NavID=037.
1.25
There was widespread support for reform, including the development of a
standard definition of flood and the Key Facts Sheet, but there was also
disagreement about the precise definition of flood and the complexity and
length required for the fact sheet.
Second round
1.26
On 9 December 2011 the then Assistant
Treasurer, the Hon Bill Shorten, MP, released draft regulations to introduce a
standard definition of "flood" for insurance contracts of home
building and home contents (combined and individual policies). The closing date
for submissions on the draft regulations was 3 February 2012.[20]
Natural Disaster Insurance Review
1.27
On 4 March 2011, the Assistant Treasurer established the Natural
Disaster Insurance Review (NDIR). The NDIR’s final report was released on
14 November 2011. The NDIR noted that it ‘was the absence of flood
insurance for many policyholders, particularly in Brisbane and Ipswich, that
was the primary stimulus for the Review.’[21]
1.28
While the NDIR commented on the need for a standard definition for flood
and a key fact sheet, its terms of reference were more wide ranging. In particular,
the NDIR examined the availability and affordability of insurance offered by
the private insurance market, with particular reference to flood but also
including other natural disasters.
1.29
The NDIR made 47 recommendations which focused on providing an
integrated solution to the availability and affordability of flood insurance.
The NDIR identified the following five essential requirements that would need
to be met by such a solution:
1. All
home insurance, home contents insurance and body corporate insurance products
need to include flood cover.
2. Discounted
insurance premiums are needed for homes, home contents and home units in areas
of medium and high flood risk, so as to render flood insurance affordable.
3. National
coordination of flood risk measurement and mitigation is needed, in order to
improve flood risk management for the benefit of the community generally and to
ensure the continuing development of a competitive market for flood insurance.
4. A
mechanism is needed to fund the discounts that are to be offered for
affordability purposes.
5. Insurers
will need access to a government-sponsored reinsurance facility if they are to
deliver flood insurance discounts without compromising their own commercial
positions.[22]
1.30
On 14 November 2011 the government released its response to the
recommendations of the NDIR. The government has sought submissions on the NDIR
paper by 30 March 2012.
Objectives and scope of the inquiry
1.31
The objective of the inquiry is to investigate the adequacy of the Bill
in achieving its policy objectives and, where possible, identify any unintended
consequences.
1.32
The committee’s role is to examine schedules 1 and 2 of the Bill, namely
the definition of flood and key facts sheet. It is noted that these measures
will be advanced through the development of regulations when the Bill is
passed. The Treasury is undertaking a detailed consultation process on both the
definition of flood and the key facts sheet.
1.33
The committee is not scrutinising the broader work undertaken by the
NDIR which focuses on flood insurance availability and affordability.
1.34
The committee notes that the measures in the Bill are part of a broader
suite of measures to address issues associated with flooding.