Dissenting Report from the Deputy Chair, Mr Keith Wolahan MP and Hon Kevin Hogan MP
Reduce Risk, Reap the Reward - Getting the basics right in flood insurance
This inquiry sought to investigate matters relating to insurers’ responses to recent natural disasters in Australia, specifically relating to:
Coalition members of the Committee are grateful to Dr Daniel Mulino MP for his management of this inquiry. Dr Mulino’s professionalism in conducting the inquiry and his enthusiasm for the inquiry is noted and appreciated. The Coalition appreciates the Chair’s acknowledgement of the serious nature of this issue and the impact on people’s lives particularly those in electorates represented by Coalition members.
Coalition members of the Standing Committee on Economics note the Inquiry’s Final Report and make the following additional comments. In noting the Chair’s willingness and attempts to negotiate a bipartisan report, the Coalition members seek to improve outcomes by providing a number of additional recommendations and disagree with aspects of the report in the interest of ensuring the sustainability of the insurance industry, affordability of insurance for Australians and reducing risk to the taxpayer.
It is important to recall the context in which the 2022 flooding events took place and the scale of its impacts, noting that it was the second largest insured event in the world in 2022, resulting in 240,000 claims. An additional 2,200 claims staff were employed by insurers in response to the event, but also that it followed the 2019/20 black summer bushfires, the global pandemic and associated issues. The Deloitte report findings noted:
The Coalition Members of the House Standing Committee on Economics were pleased with the process of the Inquiry and note the diligence of the Chair. Important information was derived from the process of the inquiry on a range of pertinent issues related to the flood insurance sector, the 2022 flood response by insurers, planning, affordability and regulation.
The Inquiry was conducted over one year and received over 100 submissions. Public hearings were held in flood-affected regions of Caboolture, Logan, Lismore, Maribyrnong, Rochester, Heathcote, Molong, Eugowra, Richmond, Parramatta, Devonport, Cairns and Townsville. This enabled witnesses and key stakeholders including disaster response agencies and local government representatives to share information, and Committee members could view impacted areas.
Recent events in the United States of America, specifically Hurricane Helene and Hurricane Milton are yet to be factored into the 2025 reinsurance market and calculations on losses not yet near completion. Milton’s insured losses will range from $30 billion-$50 billion (USD), the largest insured loss since Hurricane Ian in 2022 and caused $60 billion of losses. It is a reasonable assessment to suggest losses will be shifted to the reinsurance market.
The Coalition is committed to ensuring Australians have access to affordable insurance and a sustainable insurance sector.
The impact of high inflation on the cost and affordability of insurance cannot be underestimated. High inflation is having a significant impact on insurance costs, and the broader industry.
As a result of higher inflation, claims cost more – as prices increase. The increased cost of claims assessing, repairing and responding to claims leads to higher annual premiums.[2]
Insurers incorporate many different factors when setting premiums, including the need to cover future claims cost. In an environment of sticky high inflation insurers must maintain capital sufficient to cover the prospective claims over the period of which they are legally providing insurance services. Increasing premiums is the consequence of this inflation for consumers and higher premiums are used to cover anticipated higher future claim costs, as the price of goods and services increases.
Insurance prices are up approximately 16.2 per cent over the preceding 12 months (ranging from 16.6 per cent to 17.3 per cent) according to the Australian Bureau of Statistics.[3]
In their submission, the Insurance Council of Australia (ICA) noted the impact of inflation, along with other factors noted in the report, on recent premium increases in Australia. The ICA noted that higher inflation, especially in the construction sector was a critical issue on costs. In the ICA July 2024 snapshot, it was reported that the post-COVID cost of repairing or rebuilding a dwelling is now 27 per cent higher.[4]
Recommendation 1
The Committee recommends that insurers should continue to offer policyholders in high-risk flood areas the option to decline flood coverage while maintaining general insurance such as fire and theft protection.
Recommendation 2
The Committee recommends that Federal and State Governments address the imbalance in disaster funding, where 97% is currently allocated to response and recovery, and only 3% to mitigation. Governments at all levels must take greater action to reduce the risks of future flood events including through programs such as the Northern Rivers Resilience Initiative which will reduce the impacts of future floods, the cost of insurance and the cost of future disaster recovery.
Recommendation 3
The Committee recommends that there is a sequencing timeframe in place for the implementation of recommendations in the report, noting the onerous regulatory and reform measures currently underway in the insurance industry. It is important to note that the industry is allocating significant resources to various regulatory reform measures, and this is impacting business as usual operations with no direct link to improvements in customer service.
Flood risk can change over time due to a number of factors, including changes to the built and natural environment, updated flood mapping and risk assessment. Furthermore, the decisions by planners, including state, territory and local governments (supported by existing development regulation and processes), enables the development of residential areas in high-risk locations.
Australia needs a better approach to land use planning and harmonised planning principles that deliver a nationally consistent approach, to underpin a lower risk development environment for consumers and insurers.
Throughout the inquiry the identification of flood risk was raised by stakeholders and witnesses, along with the need to promote informed planning and development practices.
It is welcome that the report considers a review of, and increased incentives for, better land use planning, mitigation and building design to improve resilience and reduce risk. Land use planning has consistently been identified as one of the key means to reduce natural disaster risks to our communities and help build long term resilience.
There is a lack of consolidated information, or single point of truth, for urban planners, designers and builders. State/territory, local government and built environment professionals need more information to better inform their decision making and understanding of the implications of flooding and flood risk to insurance affordability.
Planners can be unsure how to participate in such processes and therefore unclear on how to properly address natural hazard risks in the land use planning process.
The Coalition welcomes the Committee’s report and recommendations in relation to planning, flood mapping and the role of the state, territory and local governments.
In relation to Recommendation 5, Coalition Members welcome the sharing of guidance developed between Engineers Australia and the Insurance Council of Australia to better inform planning decisions and drive risk reduction. This is particularly important as it relates to new builds, mitigation efforts and community infrastructure. The entire risk profile begins at the point of development in high-risk areas, and this should be considered.
The Coalition cautiously welcomes Recommendation 29 and notes the development of materials that are in the “public good” and considered to be regulatory “best practice”. There should be an adequate consideration of where the cost of recommendation 29 is carried.
The Coalition welcomes Recommendations 62 - 64, and notes this was supported by Coalition members of the Committee. Ensuring this information is available and standardised will ensure relevant stakeholders in the planning, building and government sectors are relying on a single source of flood information.
The Coalition acknowledges Recommendation 65 and implores the Australian Government to continue working with the ICA and the insurance sector to ensure affordability and sustainability in the sector.
Recommendations 71 – 72 are strongly welcomed by the Coalition and reflect the desires of many key stakeholders, including government and insurance bodies, and encourage a collaborative approach to risk reduction and awareness. The Coalition is committed to ensuring vulnerable Australians are not disproportionately put at risk through high risk, lower cost housing that result in higher insurance premiums and increased disadvantage as a result of disasters. The Coalition welcomes the approach of discouraging the take-up of high risk, poorly designed developments.
In relation to Recommendation 73, the Coalition cautiously accepts this approach on the basis of the review and application being in the domain of states and territories to consider the unique landscapes and built environments. Consistent with recommendations 71-72, the Australian Government should work in partnership with state/territories.
Affordability in the insurance market and as found throughout the course of this inquiry, particularly the flood insurance market, is increasingly unaffordable for some Australians.
The Coalition is concerned that elements of this report will make insurance less affordable and impact the availability of insurance in Australia. Recommendation 23 to detail the cost composition of premiums should also include the cost of any relevant government taxes and charges, including stamp duty and regulatory imposts imposed by the three levels of government that are driving costs.
The Coalition is concerned that the consequences of shifting costs, uplifting cover, creating new regulatory requirements and other obligations on insurers will result in higher costs, passed onto consumers through increased premiums. The Coalition urges a re-think about the necessity of the obligations and/or further consultation on implementation timeframes with industry in relation to the following recommendations:
The Coalition seeks to respond specifically to Recommendation 25. The Coalition is concerned this obligation could consequently increase overall premiums for policy holders and result in consumers opting out of insurance.
The report fails to reflect the impact on the cost of doing business for insurers and therefore the cost of offering insurance. An unintended consequence of the report’s recommendations will be increased premiums because of new regulatory cost imposts, leading to reduced affordability and flexibility.
There are limited measures in this report to improve affordability.
The Coalition welcomes the benefits that Recommendations 25, 44, 55 and 60 offer consumers.
Given the pursuit of more onerous obligations on insurers, the Coalition is concerned about the cost impost this will have across the insurance sector which ultimately will be passed onto consumers.
The Coalition notes Recommendation 3 and is concerned that it changes the Australian insurance landscape and will see insurers held accountable for household maintenance. A consequence of this approach could result in insurers being held responsible for inherent structural defects such as movement of property and inadequate ventilation. These are matters that are not factored into insurance premiums, and if included, would drive up the cost of insurance. It should be noted that this approach could increase the period of claims processing and require additional inspection by insurers and/or their contractors, and additional demand for evidence from the homeowner.
Generally, insurance covers the replacement or repair of aspects that have been compromised by a listed event regardless of the pre-existing condition. Insurers should take a practical approach and where they do not already do so, provide a guide to policy holders on home maintenance.
To address any potential negative change in policy holder behaviour that leads to higher risk (i.e. homeowners reduce their maintenance), it should be included in the guidance that where maintenance is lacking and/or highly infrequent, this can pose a significant risk to the integrity of the home. Insurance is a protection against the financial implications of flood (and other impositions), however insurance is not a solution to flood risk and should not be treated as such.
As noted throughout the hearings, the insurance industry has been subject to changes since the major flooding events of 2010/11. At a high level these changes have centred around providing consumers with additional information, more clarity about their rights, access to information, a stronger General Insurance Code of Practice, AFCA’s establishment and the use of protections against unfair contract terms on insurance contracts, regulatory and legislative changes such as the Financial Accountability Regime, an obligation to provide a Cash Settlement Fact Sheet and claims handling included in the definition of ‘financial service’.
As the ICA noted in their submission, “The Cash Settlement Fact Sheet (CSFS) obligation commenced on 1 January 2022 as part of the response to the Financial Services Royal Commission. A CSFS is a written document that insurers must give to consumers when they are offered a cash settlement, setting out the options available to settle their claim. A CSFS must outline the options available to a consumer, for example having their goods repaired or replaced, or receiving a cash payment.”
The insurance industry must take extra caution to not remove the agency of consumers in making financial decisions, and insurers should not be empowered to disenfranchise consumers from their legal right to select the best outcome for their circumstances, through corporate paternalism.
Specifically, the Coalition is concerned about government direction in relation to recommendations 36, 37, 39 and 40. If acceptable, a process of co-design should be undertaken with industry for development and implementation.
The Coalition believes it is not the role of the Australian Government to determine how any business is structured, including insurance, and workforce development and planning should be left to individual firms. Recommendations 37 and 38 should be provided as guidance and as recommendations to support future flooding events, as opposed to being pursued as legal obligations. This is duplicative of the Deloitte review being implemented by the ICA to address resourcing capability, including for catastrophe events, with a focus on workforce planning, resourcing models, catastrophe onboarding, training and competency management.
The Coalition, while cautiously supportive of this recommendation, if adopted then clear, definitive guidance should be provided and be consistent with industry standards and comparable to other financial services sectors.
Throughout the inquiry insurers noted the significant number of requests from agencies, authorities and government in relation to the data they hold. These include regulators, emergency management authorities, Treasury and Parliamentarians.
Data sharing is a complex element in public policy, and this has been exhausted across many sectors. There is no industry data standard, which makes it extremely complex, costly and inefficient for different insurers to have a single data sharing proposal. These recommendations are going to take substantial time and resources for implementation.
As per the ICA’s evidence (Submission 11), it was noted “Policy-level and claims data is collected by insurers but not submitted to the regulators on an ongoing basis so the format, data items and definitions adopted will vary from insurer to insurer and differ from what is proposed by the regulators. For example, the proposed policy-level data includes the policyholders' address ('risk street' and 'risk suburb'), home building's 'year of construction', 'building type' and policy coverage details.”
ICA is currently working with the Australian Prudential Regulation Authority on data transformation and has noted in a submission that this will “…require significant upfront investment and sustained (increased) resourcing. As such, ICA members are eager to co-design the data collection with the regulators to ensure that any future collection will effectively inform policy development, government initiatives, regulatory reform and good consumer outcomes. IDT intends to collect granular data that can be shared across government agencies, but this is separate to an insurers' Code Governance Committee data reporting obligations, and the data items and definitions are not expected to align, posing additional data collection and dissemination challenges.”[5]
The cost implications and delivery timeframes should be considered and the implications for business-as-usual operations noted.
The Coalition is committed to lower, fairer and simpler taxes and welcomes Recommendation 86 in full.
The Coalition is generally supportive of Recommendations 81-83 and looks forward to further work being undertaken in this regard
The Coalition is deeply concerned about aspects of Recommendation 70 and does not support the broadening of government reinsurance pools.
California’s insurance market demonstrates this, where the experience has seen more than half of firms offering insurance exit the market because of increased exposure to risk (high risk development), worsening weather and regulatory intervention. A consequence of this interventionist approach has resulted in less competition, lower availability of insurance offering and poorly designed regulatory settings that do not enable insurers to accurately incorporate risk into premiums.[6]
The Coalition recommends that any regulatory intervention does not impose limitations on insurers to model risk, set premiums, accordingly, impose caps on premiums or limit the insurance market’s capacity to accurately price environment risk.
The Coalition notes such intervention in the United States of America, specifically in California, Florida and Texas that has had significant consequences for the insurance market and shifted the risk and cost of insurance to the taxpayer.
The Coalition notes the global experience and recommends against the establishment of an Australian Government backed flood insurance scheme, such as the National Flood Insurance Program (NFIP). Under the NFIP, the Federal Government in the United States has paid more than $51 billion in flood losses, with approximately $26 billion of this paid to only 25 localities. A report by the University of Chicago[7] has identified these counties as some of the fastest growing by population, demonstrating the shifting of risk and cost to the taxpayer, which is indirectly incentivising high risk developments and resulting in a cross subsidisation.
The Coalition Members of the Standing Committee on Economics thank all Committee members for their participation and contributions throughout the course of this Inquiry, and also thank the Committee Secretariat for their professional support of the Inquiry.
The Coalition Members also note the considerable time and effort of all witnesses and members of the community that developed and provided submissions, attended hearings and provided witness evidence. The Coalition urges the government to avoid interventionist tendencies which have been shown to make insurance unsustainable, expensive and transferring risk to the Australian taxpayer.
Mr Garth Hamilton MP
Deputy Chair
16 October 2024
Mr Keith Wolahan MP
Hon Kevin Hogan MP
Footnotes
[1]Deloitte, The new benchmark for catastrophe preparedness in Australia, October 2023
[2]Swiss RE, Submission 20, page 1.
[3]Annual living cost increase highest for Employee households | Australian Bureau of Statistics (abs.gov.au), https://www.abs.gov.au/media-centre/media-releases/annual-living-cost-increase-highest-employee-households
[4]Insurance Council of Australia, Insurance Snapshot 2024, p. 1, https://insurancecouncil.com.au/wp-content/uploads/2024/07/INCA015-Fact-Pack_v12_No-Crop-Marks.pdf
[5]General Insurance Discussion Paper – Insurance Data Transformation (insurancecouncil.com.au), https://insurancecouncil.com.au/wp-content/uploads/2023/12/231221_ICA-Submission-to-APRA-Insurance-Data-Transformation.pdf
[6]CAL Fire (2024) Fire Statistics. Accessed at: Statistics | CAL FIRE, https://www.fire.ca.gov/our-impact/statistics
[7]Does the National Flood Insurance Program Drive Migration to Higher Risk Areas? | Journal of the Association of Environmental and Resource Economists: Vol 11, No 2 (uchicago.edu), https://www.journals.uchicago.edu/doi/10.1086/726155
Insurers' responses to 2022 major flood claims survey
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