Unprecedented scrutiny of insurance
since the catastrophic flooding which hit south-east Queensland and Victoria in December and January will determine how policyholders are protected in future disasters.
Following widespread confusion amongst owners of inundated properties about what they were covered for, and a range of definitions of flood being used by insurers, the Federal Government initiated reviews to develop a standard definition and to examine the availability of cover to individuals and businesses for damage and loss associated with flood and other natural disasters.
The Federal Treasury issued a discussion paper on a uniform definition of flood to be used by all insurers to either cover it or exclude it in their policies:
"Flood means the covering of normally dry land by water that has
escaped or been released from the normal confines of:
- any lake, or any river, creek or other natural watercourse, whether or not altered or modified; or
- any reservoir, canal, or dam."
Brokers Support Standard Definition
Brokers’ views have been represented by the National Insurance Brokers Association (NIBA). In its submission NIBA agreed that a standard definition will go a long way towards ending policyholder confusion, but questioned whether an alternative form of words should be used.
“The difficulty with the term ‘flood’ is that a consumer’s understanding of what the term may or may not mean...is very broad, as is the case with the typical dictionary definition,” the submission said. NIBA also suggests that policyholders could be advised on where to obtain information on the flood risk of their area, for example from the local council, and encouraged to seek advice about what cover they need from a licensed expert if they are unsure.
NIBA warned that the standard definition and other proposals would not address some issues that commonly arise in relation to flood claims, notably, what is the cause of the damage if there is a mixture of flood water and storm water, yet flood is excluded in the policy.
A solution could include making an independent expert’s opinion as to the cause of damage binding on both parties and legislative changes clarifying what happens to claims when flood water and storm water combine.
“Appropriate advice from professionals such as insurance brokers can assist in reducing confusion and the proposed change will make it easier for insurance brokers to advise their clients,” NIBA said in its submission.
Disaster Insurance Paper Released
Meanwhile, the Natural Disaster Insurance Review, established by Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, has just issued a discussion paper looking at a range of issues, including how to make flood cover more widely available to property owners.
The options in the paper are full flood
cover, with all insurers compelled to offer cover for all insured properties, an opt out provision that allows property owners to insure without taking flood
cover, and the status quo in which insurers are free to offer or not offer cover.
The paper notes that under the first option disputes over whether the damage was caused by storm or flood water
would be eliminated, but property owners in flood prone
areas would pay substantially higher premiums unless there was some form of subsidy or discount.
Funding for such a subsidy would need to come from governments (taxpayers), councils (ratepayers) or insurance (other policyholders), all of which required further examination.
Issues for Small Business
The paper also looked at the specific problems facing small businesses
, the majority of which do not have flood cover. Small business owners
, who are more likely to use a broker
, have more specialised insurance requirements, are more price sensitive and less likely to purchase additional cover such as flood insurance
The number of insurers providing small business insurance
is limited, and any compulsion for them to provide insurance cover could see some withdraw from the market, reducing competition and pushing up costs.
NIBA CEO, Noel Pettersen, said anecdotal feedback from brokers with clients in flood affected areas showed the lessons learned were much the same as for householders -- be aware of the likely impact of flood on your business, heed warnings from the authorities and be prepared, if possible, to move stock and equipment.
“Brokers have said they would welcome flood cover being more widely available, but priced separately so the client could decide whether they wanted to pay the additional cost,” he said.
Insurers want Broader Debate
Insurers have also expressed concern that a requirement to include flood cover in all policies would override individual underwriters’ appetite for risk and would not discourage householders and businesses from building in
They have called for a broader debate on how governments at all levels deal with mitigating flood risk, including mapping, planning, zoning and building standards.
The Federal Attorney General, Robert McClelland touched on these issues when he recently told a conference that perhaps the Federal Government should consider putting more funds into mitigation and resilience measures rather than just doling out relief payments after each disaster.
“Put simply it is counter-productive if government assistance acts as a disincentive to people taking steps to build their own resilience – such as taking out insurance
. I believe we need to be more strategic and more ambitious than
just getting people back on their feet – only to be knocked down again.
“We need to look at minimising our exposure to disaster risks over the short, medium and long term – and this means focussing as much on prevention and mitigation as on recovery,” he said.
Publisher: Alex Bodnar
- Authorised Representative of Insurance Advisernet
. A member of the Panel of Expert Bloggers
and an expert on www.aiia.biz
Disclaimer: The information in this publication is of general nature as a service to interested parties. This article is not intended to provide a complete discussion of the subject and should not be taken as advice. While the information is believed to be correct, no responsibility is accepted for any statements or opinion or error or omission.