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Disaster mitigation: a challenge to insurers

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The Productivity Commission sees a major role for the insurance industry in making the country better prepared for natural disasters – and not just by paying claims.

The commission’s report on natural disaster funding says insurers “can and should” do more to inform households about their insurance policies, the hazards they face and the indicative costs of rebuilding after a disaster.

“Insurance markets in Australia for natural disaster risk are generally working well and pricing is increasingly risk-reflective,” the report, tabled in Federal Parliament last week, says.

But the commission wants the industry to step up on forming partnerships with governments to mitigate risk, as well as giving householders more information and lower premiums when they take action to prevent loss.

The industry has largely welcomed the report, which echoes insurers’ calls for more mitigation funding and less post-disaster recovery spending. It also takes a generally favourable view of the insurance market.

But will insurers provide consumers with more information? 

That’s not so simple, according to the Insurance Council of Australia (ICA), which says reforms and improvements to advice and disclosure regimes are needed first.

ICA and its members are working with the Australian Securities and Investments Commission on ways insurers can provide enhanced advice, an ICA spokesman told insuranceNEWS.com.au.

“The uncertain Corporations Act boundary between personal and general advice discourages general insurers from providing more tailored information to consumers about their policies,” he said.

Suncorp Personal Insurance CEO Mark Milliner, who has been a leading voice in the mitigation push, says the insurer has already made significant changes to address underinsurance during sales processes.

“More widely, ICA’s disclosure taskforce will shortly be examining these issues to map out how the industry as a whole can do better in these areas,” he told insuranceNEWS.com.au.

Insurers have argued they do not have the information to advise consumers of the extra costs of rebuilding in some high-risk areas, such as the Blue Mountains, where many homeowners found themselves unwittingly underinsured after the 2013 bushfires.

And while the companies have invested more in pricing for risk rather than relying on postcodes, the value of the investment and what it can deliver for the profitability of their portfolios means they may be unwilling to hand over valuable and confidential data.

Although many submissions to the inquiry called for a national database, the commission is cool on the idea, saying “central repositories can be costly and inflexible, and may not meet the diversity in information needs across users”.

The benefits of a national data-clearing house would not outweigh the costs, it says.

It calls for state, territory and local governments and insurers to “explore opportunities” for collaboration and partnerships.

ICA and state-based local government associations could share natural hazard and claims data, expertise and information.

It sets a one-year timeframe for ICA to develop guidelines allowing insurers to provide standardised information to householders regarding policies, natural hazards and rebuilding costs.

IAG continues to support development of a national database covering demographic, weather, topography and geological, and assets data, as proposed by the Australian Business Roundtable for Disaster Resilience & Safer Communities.

“As the availability of data has increased, we welcome the recommendation that governments at all levels should make new and currently held natural hazard data publicly available in accordance with open public sector information principles,” an IAG spokesman told insuranceNEWS.com.au.

Nevertheless, ICA and insurers are keen to work with all levels of government on taking the recommendations further.

QBE Australia and New Zealand CEO Colin Fagen says the commission’s focus on the importance of mitigation “clearly outlines the need for us as a country to change the way we prepare and respond to these events”.

The report coincides with an investigation into funding arrangements by the Australian National Audit Office, and Mr Fagen says both highlight the inefficiencies of current systems and the need for change.

Federal Justice Minister Michael Keenan is opening discussions with the states on how to implement the report’s recommendations.

The talks could be lively, or short, given the Federal Government mostly foots the bill for disaster recovery and the commission finds the arrangements “are not efficient, equitable or sustainable”.

They are prone to “short-term political opportunism” and create a disincentive to state and local governments to reduce risk, particularly through town planning, or to invest in mitigation or insurance.

Governments overspend on areas that attract funding and underspend on efforts that might be more useful, the commission says.

The arrangements were intended to help the states when a natural disaster imposed a huge burden, but they have gone beyond that to the point where the Federal Government has become an “insurer of first resort” and is paying out for small, routine weather events.

“States need to shoulder a greater share of natural disaster recovery costs to sharpen incentives to manage, mitigate and insure against these risks,” the commission says.

It proposes mechanisms that allow assets to be rebuilt so they are more robust, and it wants the Federal Government to gradually increase mitigation funding to the states to $200 million a year – which they would have to match.

Insurers have welcomed the figure and the logic behind the proposal.

They also want better town planning, a view echoed by the commission, which heard from Suncorp about Gold Coast City Council’s approval for a 970-unit complex on a floodplain.

“Although the development is sufficiently high-risk to warrant an evacuation helipad, a three-day emergency food supply and two lifeboats, the council felt it did not have the legal standing to decline the development application,” the commission says.

The commission does not support subsidised premiums, particularly where high premiums reflect risk, and it flags the possibility of relocation.

ICA has welcomed the commission’s call to abolish insurance taxes, which the report says significantly raise the cost of cover and encourage underinsurance.

The commission began its inquiry last year and consulted industry players, as well as receiving submissions from them. 

There were further consultations following the release of a draft report last September.

Mr Milliner says a long-term plan and vision to prepare the country for natural disasters are “desperately needed” and the commission has provided a vital blueprint.

Mr Fagen says the issue is extremely complex but QBE is looking forward to working with governments to get the best outcome for the community

The commission says its recommendations should be implemented in full, because “cherry-picking” will skew the balance between mitigation and recovery.

It has been a long process that builds on the knowledge and recommendations of other investigations into recent natural disasters, but one that will hopefully lead to more effective preparation for natural disasters and less money going down the drain.