2011 is shaping up to be the year of the flood. In January, an area the size of France and Germany in central Queensland was under water. Since that time, other parts of Australia have been impacted by flood events. When regard is had to the sheer scale of the flooding disasters, questions have been raised about the need to reform government policy and for reliable flood data. As the stories of loss are aired in the media, disclosure under insurance policies has also become a politically charged issue. There has been suggestion of broadening the Australian Consumer Law to cover insurance policies. We consider these issues below.
Flood and disaster insurance is a government priority with Assistant Treasurer and Minister for Financial Services and Superannuation Bill Shorten taking a particular interest. There have been some indications of the policy orientation of the government on some key issues.
Self-insurance encouraged. On 13 February 2011 the Council of Australian Governments (COAG) adopted the National Strategy for Disaster Resilience (NSDR) and agreed to take immediate steps to implement it. The NSDR identifies adequate self-insurance as an alternative to risk mitigation arrangements for settlements, businesses and, importantly, infrastructure. The terms of reference of the National Disaster Insurance Review (NDIR) say that self-insurance should be encouraged where practicable, and the NDIR’s current preference is for the “full flood” insurance solution under which all home insurance policies would need to cover flood. The Australian Government has agreed to permit insurance premiums to be paid using Centrepay - via direct deduction from Centrelink payments. On 9 June 2011 in a speech to the Brotherhood of St Laurence in Fitzroy Mr Shorten said reduction of levels of non or under-insurance was key to reduce reliance on taxpayers to support individuals after natural disasters.
Government intervention in private insurance markets is a last resort, but government subsidies are a possibility. One of the actions mentioned in the COAG communiqué was steps to support the take-up of insurance. The NDIR terms of reference provide that government intervention is justifiable only to the extent there is clear failure by those private markets to offer appropriate cover at affordable premiums. At an Institute of Actuaries Australia (IAA) seminar on 16 May 2011 Attorney-General Robert McClelland said that government assistance created disincentives to self-insure, and that it was important to expand the pool of available insurers. Mr John Trowbridge, chair of the NDIR, told the same seminar that full flood cover would be most desirable, but that would require government subsidies on cover for high risk property. That policy orientation is reflected in the NDIR’s June 2011 issues paper. The paper moots two alternatives - automatic full flood cover, or automatic full flood cover with the ability for insureds to opt out. The paper says that both options require a subsidy to be given to high flood risk properties. The “high risk” cut off would be either an engineering threshold (determined by assessment of risk) or a price threshold (determined by a threshold insurance premium relative to a non-flood insurance premium). Under both systems, there would be a central insurers’ mutual or a reinsurer to assume flood risk, funded in part by flood insurance premiums and in part by either taxpayers, ratepayers or a levy on insurers themselves.
Development and risk mitigation are key priorities. The NSDR identifies as a priority the need for development decisions, as well as decisions to rebuild after a disaster, to take account of private and public risks, and ensure settlements, businesses and infrastructure are, as far as practicable, not exposed to unreasonable risks from hazards or have implemented suitable arrangements, which may include hardening infrastructure. It also identifies as a priority the development of community partnerships and community and volunteer capacity to cope with disasters. The NDIR terms of reference identify that individual and government mitigation of risk is key. Mr McClelland said at the IAA that mitigation rather than relief and recovery should be a funding priority otherwise the taxpayer risked becoming the “default insurer of last resort”. He said that rebuilding should not be an automatic option. He said that it was important to address land use, zoning and building standards.
Information sharing is a focus. Mr McClelland identified availability of flood data as a priority area. The NSDR identifies as priorities collaborating on and sharing risk assessments, applying consistent methodologies and data frameworks and promoting community access to risk information.
Reviews and inquiries
A number of reviews and inquiries arising from the Queensland floods have implications for insurers and insureds:
- The “Improving Disaster Resilience Forum” held at the Australian Strategic Policy Institute (ASPI) in Sydney on 28 April 2011. According to Mr McClelland, this forum was to discuss issues such as land use planning and urban development, insurance, and balancing disaster recovery and mitigation.
- The Senate Economics References Committee inquiry into state government insurance and the flood levy. The committee was directed to examine the provisions of the flood levy bills, current insurance and reinsurance arrangements for state and territory assets and infrastructure, and the appropriateness of fiscal arrangements for natural disaster reconstruction efforts. It is due to report by 30 June 2011.
- The National Disaster Insurance Review, announced by Mr Shorten on 4 March 2011. It has wide ranging terms of reference to consider flood and other natural disaster insurance arrangements for individuals and businesses. It will examine, among other things, non-insurance and underinsurance, the ability of private insurance markets to offer natural disaster insurance and ways to improve that ability, consumer awareness and assistance measures and the impact of government disaster mitigation measures. It will also examine the possibility of subsidising insurance premiums in areas of highest risk, and a national reinsurance pool similar to that created in 2003 in respect of terrorism risks for commercial property. The NDIR released an issues paper in June 2011 (discussed elsewhere in this publication) and is due to report to Mr Shorten by 30 September 2011.
- The Queensland Floods Commission of Inquiry. Its terms of reference are sweeping. Its focus so far has been the management of the Wivenhoe Dam and an interim report will be delivered on 1 August 2011 on matters that could better prepare Queensland for next summer. Later this year there will be a second round of hearings into the performance of private insurers in meeting their claims responsibilities and into land use planning to minimise impacts from floods. These issues will be addressed in the final report, due on 24 February 2012. The inquiry has extended the time for written submissions on private insurers to 15 June 2011, counsel assisting the inquiry Peter Callaghan saying that since the previous deadline of 4 April “it may be that some Queenslanders have … had experiences which they feel the Commission should hear.”
- Mr Shorten will chair the new Insurance Reform Advisory Group, with members from Treasury and the Attorney-General’s Department. It will be an ongoing forum for peak industry and consumer bodies to discuss insurance issues for reform to legislation or regulatory and industry practices.
- The House Standing Committee on Social Policy and Legal Affairs inquiry into the operation of the insurance industry during disaster events. This inquiry will focus on insurance claims processing, including information given about claims progress, timeframes, engagement of third party experts and external dispute resolution arrangements. Submissions close on 15 July 2011 and the Committee is also conducting an online survey of claimants.
National Flood Information Database
The only reliable way for insurers to be able to make a meaningful assessment of flood risk is with information. Insurers need to know the location of affected properties, how frequently those properties may be affected, how severe a flood event may be and finally, the extent to which multiple properties are likely to be affected in a short period of time.
Since late 2008, insurers have been directing funding through the Insurance Council of Australia towards a National Flood Information Database (Database). The Database is designed to detail flood zones. The Database is compiled from publicly available flood information provided by State Government and Local Councils. The Database is a work in progress and is gradually being expanded to new areas and to include updated hydrological information.
A major impediment to the development of the Database is that not all State Governments and Local Authorities are willing to release flood maps. Similarly, where flood maps are made available, there are often broad disclaimers accompanying the information. This includes that the Local Authority does not provide warranties or representations about the accuracy of the data and disclaims any responsibility, liability or omission that arises in connection with or in relation to the use or reliance by any person of the data.
Until State Governments and Local Authorities are forthcoming with information and have comfort that they will not be exposed for providing information about flooding, there are likely to be significant hurdles to the development of the Database. The result may be that insurers are still unable to assess risk and by implication, provide flood cover in a wider range of circumstances.
The Australian Consumer Law and related consumer reforms
There have been calls for greater disclosure around what an insurance policy covers and what a policy does not cover. Currently, section 34(1) of the Insurance Contracts Act 1984 (Cth) provides that where a claim is made under a “prescribed contract” and the event that gives rise to the claim is a “prescribed event”, the insurer can not refuse to pay an amount equal to the minimum in relation to the claim. However, under section 34(2) of the Insurance Contracts Act, an insurer may avoid providing cover in relation to certain “prescribed events”. This is where before the contract was entered into, the insurer clearly informed the insured in writing or the insured knew that liability would be less than the minimum amount under the Insurance Contracts Regulations 1985 (Cth) or that the contract would not provide insurance cover in respect of the happening of the event. Questions have been raised as to whether the Australian Consumer Law should be expanded to offer greater consumer protections in these circumstances and more generally for consumers in dealing with insurers. There are suggestions, including recently from Mr Shorten, that the Federal Government wishes to bring insurance contracts within the unfair contract terms framework. There is discussion around how the unfair contracts framework may operate, including when actions may be brought and to whom. There is also discussion about making key facts statement summaries of insurance policies available to consumers (see our article on these in this update). This is very much a developing area.