Chair's foreword

In 2022, floods devastated communities right across Australia. The floods in Queensland, NSW, Victoria and Tasmania led to more than 300,000 claims being lodged – more than for any other natural disasters in Australia’s history.

This report outlines the findings and recommendations from a year of investigation by the House of Representatives Standing Committee on Economics. In addition to hearing from insurance CEOs, regulators and leading consumer advocates, the Committee travelled to affected communities and heard directly from individuals, businesses and community leaders about the response by insurers and the impacts of the floods on their lives and livelihoods.

This report contains 86 recommendations that were supported by all Committee members. The implementation of these recommendations will lead to better claims management, more transparent reporting of insurer performance, lower premiums for households exposed to a high risk of flooding and improved long-term strategies for flood preparation and resilience.

This report examines the three “P”s of flood insurance: policyholders, pooling and preparation.

Policyholders need to be treated better.

Pooling mechanisms need to be strengthened.

And preparation needs to be given more priority.

Policyholders

Policyholders have a right to expect the timely and fair consideration of their claims. While many cases arising from the 2022 floods were handled well, too many were badly mishandled by insurers.

Direct witness testimony heard by the Committee, as well as case studies referenced in submissions, detailed instances of poor treatment and a range of systemic problems. Inconsistent decision-making meant neighbours received different outcomes after the same water event. Sometimes, this was the result of poor-quality expert reports commissioned by insurers. Long delays due to poor communication and disputes over causation resulted in emotional, mental health and financial strains for many families. More than two years on from the floods, many people still have not been able to move back into their homes. The Committee heard heartbreaking stories of families moving from motel to motel at short notice for months, only to end up camping in sheds and backyards after their allowance expired after 12 months – regardless of whether repairs on their home are complete. Initial offers were often too low, which was especially problematic where this involved final cash settlements. The Committee also heard about too many cases of vulnerable people not being identified and missing out on sufficient assistance.

The ASIC and Deloitte reports of 2022 found that improvements were needed in communication, claims management, dispute resolution and the management of cash settlements. Following on from these reports, insurers have pointed to improvements in their training and IT systems. More work is needed, however, and in particular more transparency is required in relation to the effectiveness of measures undertaken by insurers. This report contains recommendations that set out new arrangements for the robust reporting of claims handling data to regulators and the publication of this data in order to hold insurers to account.

A number of recommendations adopted by the Committee relate to the General Insurance Code of Practice (the Code). The Code needs to be strengthened as a priority. The Committee recommended that the Insurance Council of Australia (ICA) register the Code with ASIC for approval and, further, that the Code become a contractually enforceable element of the policyholder’s insurance contract.

In addition, the Committee recommended a number of areas where regulation could be strengthened including:

That legislation standardise key terms across all insurance contracts, including in relation to non-flood forms of water damage, “wear and tear” and “lack of maintenance”.
That insurers should provide guidance material to consumers at emergency hubs in the immediate aftermath of floods in relation to first steps that should be taken when cleaning properties, including how to strip out the property and what evidence to collect. This guidance should be nationally consistent and consistent across all insurers.
That the Code should set out meaningful timelines in relation to communication with customers and clearly set out what information should be provided.
Clearer regulatory guidance in relation to the preparation of expert reports where these impact on the decision as to whether to grant a claim, including hydrology reports and technical building reports.
A requirement that insurers provide guidance to policyholders in relation to maintenance obligations for key aspects of a residential building. This is particularly important given how many claims were rejected on the basis of insufficient maintenance.
A requirement that insurers make a decision on whether to accept or deny the claim within 12 months and, if that does not occur, that insurers automatically pay out the claimed amount in full.
That insurers strengthen their internal dispute resolution processes so that less cases progress to AFCA.
That key data in relation to claims management performance be provided by insurers to ASIC quarterly and, after a natural disaster, monthly and that ASIC publish this data.

Pooling

Pooling is the key mechanism by which both private and social insurance protects people from unexpected and unpredictable negative outcomes. Premiums are pooled so as to be distributed to those adversely affected. This is the key underpinning of both public and private insurance.

The private insurance market for residential homes and small businesses has largely functioned well in relation to most natural disasters in Australia for decades. Having said that, flooding is one of the most challenging forms of natural disaster, particularly for households and businesses in high-risk areas. There is a non-diversifiable aspect of flood risk that can result in extremely high premiums for at-risk properties.

This report identifies a number of areas where pooling is either currently not functioning as well as it should or where it is under threat.

At present, insurance policies have varying lengths for the provision of temporary accommodation and, in many instances, a maximum guaranteed length that often falls short of the actual time it takes to complete the rebuild. In some policies, the cost of temporary accommodation comes out of the sum insured. This leaves a considerable amount of risk with households not well placed to manage it, particularly when they are still getting back onto their feet. This is an instance of a risk that is not being sufficiently pooled. The Committee believes that it would be better for insurers to assume the risk of how long it takes to complete works and to manage and bear the cost of temporary accommodation. This should become the default in policies.

Another area where policyholders face considerable risk is where the pre-existing condition of a material aspect of the building is unobservable. The most common example of this identified during the course of the inquiry was stumps. Policyholders often pay premiums for decades with neither the insurer nor the insured knowing the state of the stumps. It is understandably frustrating when, after a flood, the floorboards are taken up and an insured person or family is told that they will not be paid out due to the condition of the stumps. This aspect of coverage almost becomes a lottery. One could argue that too much of the responsibility for the condition of this aspect of the property is placed on consumers not aware that this is even an issue. Arguably, the underwriting of this risk is occurring after the event rather than at the time the policy is obtained. The Committee recognises that insurers should not assume the risk of all pre-existing damage. This would be inefficient and lead to higher premiums. But stumps are a tightly definable example of where there is currently too much risk being placed on households which could be pooled better. The Committee recommends that insurers should take this responsibility on unless clearly specified otherwise.

Finally, the increasingly granular, high-quality data that insurers generate and rely upon is undermining pooling, particularly at the higher risk end of the market. It is increasingly possible to accurately identify individual properties at very high risk of flooding. This results in extremely high premiums for flood insurance for these households. Given that insurers are increasingly moving away from opt-out policies, this creates a risk that a large number of properties will not be insurable at all. Based on ICA data, around 230,000 properties are currently at a 1-in-20 year risk of flooding or higher. Over coming decades, this number will grow with climate change and continued development. It is for this reason that the Committee believes that some form of government intervention will be required. This is reflected in the fact that governments intervene in flood markets in most advanced economies. Of course, some interventions are better designed than others. This is a topic that warrants urgent consideration. The Committee sets out a number of principles to guide any intervention by government. One of them is that community and household level mitigation continue as set out below. Another is that no further development should occur in areas of high flood risk (or other natural disaster perils for that matter).

Preparation

The best way to reduce premiums is to reduce the underlying risk.

In 2014, the Productivity Commission found that around 97 per cent of natural disaster funding from the Australian and state and territory governments went towards responses after natural disasters and a mere 3 per cent was to invest in mitigation and resilience. Since the Australian Government committed to $200 million per year for the Disaster Ready Fund (DRF) and also partnered with the Queensland and NSW governments on resilience authorities, that ratio has materially improved. But it is still not where it needs to be.

The DRF offers an opportunity to substantially reduce the risk of flooding for communities exposed to a high risk of flooding. Roma offers an example of where community level mitigation coupled with price monitoring can result in significant premium reductions.

In addition to community level mitigation, there is a range of property level mitigation measures that can be effective. For high-risk properties, this includes house buybacks and investments in resilience, such as house raisings. For all properties, there is a wide range of lower cost measures such as more resilient flooring, more flood-resistant construction materials, better placed electrical equipment and on the list goes. The Bushfire Resilience Rating App should be extended to flood risk along with an obligation on insurers to reduce premiums where households reasonably prove that the mitigation works have been completed.

In addition to more mitigation at the community and household level, we need to stop the building of more homes and businesses in high-risk areas. This has been difficult due to the decentralised nature of decision-making. The Australian Government could do more in this space by publishing property level risk data for developments on newly zoned land. In addition, the government could co-operate with banks to limit or constrain borrowing to housing developments on newly approved land in areas of 1-in-100 year risk or more. More housing is being approved in inappropriate areas as this report goes to print and this needs to stop.

The Way Forward

This report includes 86 recommendations that will result in better outcomes for consumers – and, in particular, for vulnerable consumers and households at high risk of flood. This is partly a question of better claims management and partly about better long-term settings for reducing the nation’s underlying risk of flood. Only if we move forward on both fronts can we truly make progress for Australians at risk of future flood events.

Finally, as Chair I would like to thank, on behalf of the entire Committee, all those who shared their experiences of the floods and their aftermath for this report. For many people it was difficult to participate in our process, particularly by giving evidence at public hearings. We acknowledge that many are still recovering from the financial and mental health toll and are very grateful that so many still found time to provide valuable insights so that others may benefit from a fairer system in the future.

Dr Daniel Mulino MP

Chair