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Natural Disaster Insurance Review - submissions due within two weeks

5 July 2011

The Natural Disaster Insurance Review Panel today reminded people and organisations that the deadline to make contributions to the Review is rapidly approaching. The closing date for submissions is 14 July 2011.

'We are keen to hear from anyone interested in the availability and affordability of insurance with particular emphasis on flood and other natural disasters. All opinions are welcome, especially from members of the community who have been directly affected by the floods and other extreme weather events of the past summer,' the Chairman of the Review, Mr John Trowbridge, said.

Submissions can be as short as a few paragraphs. The Panel may also seek additional information or clarification from interested parties. The Review Panel will consider all input in preparing its report and recommendations for the Assistant Treasurer, the Hon Bill Shorten MP by
30 September 2011.

'Since commencing the Review we have met with a range of stakeholders and addressed a number of different forums. This week for example we will be meeting various insurance executives, addressing the Institute of Actuaries of Australia and meeting with water engineers in Sydney. The Panel will also be revisiting Brisbane and travelling to Cairns, Innisfail and Tully.'

Further visits and meetings are planned. For example, next week the Panel members participate in an Australian Centre for Financial Studies Forum in Melbourne and a University of Queensland event in Brisbane. 'The Panel has previously met with a range of interested people including consumer representatives, social workers, building experts, local councils, banks and credit unions, as well as with insurers.'

The Review was announced on 4 March 2011 by the Assistant Treasurer.

Insurance plays a key role in the recovery from natural disaster and the private insurance industry has in large part responded effectively to the recent series of storms, floods and cyclones. However, the absence of flood insurance for many policyholders, particularly in Brisbane and Ipswich, has led to considerable financial distress for some homeowners, to many disputes with insurers and to community concern over the coverage of flood in home insurance policies. That is the primary stimulus for the Review.

On 2 June 2011, the Review released an Issues Paper. Also on the website is a summary of the full Paper and an easy-to-read Overview. The Paper has now been distributed widely including to every local government authority in Australia along with insurers, consumer groups and others.

The Issues Paper identifies two alternative models of flood insurance for the future: that flood cover be provided automatically as part of home insurance, just as it provides cover automatically for bushfire and storm; or that flood cover be provided automatically but that homeowners be able to 'opt out' and have home insurance that includes cover for other causes of damage but not flood. The other main possibility is to retain the status quo whereby insurers remain free to offer full, partial or nil flood cover for home insurance and homeowners are free to decide whether or not to  include flood cover in their home insurance policies.

'We have tried to explain these two models in sufficient detail for experts and consumers alike to be able to offer their considered views on the relative merits of the two models. We are keen to hear from all interested parties on their assessments of these two models. But I stress that they are concepts only and not yet fully developed. The Review Panel has not yet taken a position or a view on any of the matters raised in the Issues Paper pending submissions now being invited on the Paper.'

The Issues Paper also considers whether any new arrangements for flood insurance for homes might be extended to home units, contents and small business.

Other matters considered in the Paper that have been highlighted by recent natural disasters include non-insurance and under-insurance, replacement cover vs sum insured, consumer awareness and insurance dispute resolution. The Paper also looks at flood risk measurement and mitigation, and some aspects of government funding of natural disaster relief and recovery.

To assist those making a contribution, the Issues Paper sets out a number of questions that highlight issues of particular interest to the Review Panel. However, contributions are welcome on any or all relevant issues.

The Natural Disaster Insurance Review Panel

Mr John Trowbridge (Chairman)
Mr John Berrill
Mr Jim Minto

Natural Disaster Insurance Review - Release Of Issues Paper

2 June 2011

The Natural Disaster Insurance Review Panel today released an Issues Paper inviting interested people and organisations to make submissions to the Review.

The Review was announced on 4 March 2011 by the Assistant Treasurer, the Hon Bill Shorten MP, following the floods and other extreme weather events of the past summer. The Review Panel was asked to examine the availability and affordability of insurance with particular emphasis on flood and other natural disasters.

In releasing the paper, the Chairman of the Review, Mr John Trowbridge, said: 'The events of last summer have highlighted the problems posed by floods for both householders and insurers. Improving access to flood cover for home insurance has emerged as the key issue facing the Review Panel.'

In the wake of the floods, it was clear that many of the people affected had home insurance that did not cover them for flood. Some people did not take out flood cover thinking that their homes were not likely to flood. Others were unaware that they were not covered for flood or found the detail of their insurance policies confusing. This has not only left them without insurance cover, it has also led to disputes and lengthy delays with insurers about whether the damage to their home was caused by storm, for which they automatically had cover under their home insurance policy, or flood.

The Issues Paper identifies two alternative models of flood insurance for the future: that flood cover be provided automatically as part of home insurance, just as it provides cover automatically for bushfire and storm; or that flood cover be provided automatically but that homeowners be able to 'opt out' and have home insurance that includes cover for other causes of damage but not flood. The other main possibility is to retain the status quo whereby insurers remain free to offer full, partial or nil flood cover for home insurance and homeowners are free to decide whether or not to include flood cover in their home insurance policies.

'If flood cover were included automatically as part of home insurance, all disputes about whether water damage is caused by flood or storm would be eliminated. Flood cover would then be in place at the same level as fire and storm cover for every insured home. Some homeowners, however, would face significant increases in insurance premiums under such a model unless these homeowners were given some form of assistance to enable them to continue to insure their homes. Such an arrangement, in benefiting the homeowners themselves, would also benefit the broader community. Insurance helps both individuals and communities recover from disasters, it encourages mitigation by the homeowner which also benefits the community, and reduces the impost on charitable donors or taxpayers.'

The Issues Paper considers a model to encourage the take-up of flood insurance through a system of discounts to protect eligible homeowners in flood-prone areas from major increases in their home insurance premiums. The discounts would need to be funded and, if possible, to operate in such a way as to encourage homeowners, property developers, councils, insurers and governments all to engage in flood risk mitigation.

'Although the insurance industry is working to make flood cover more widely available, the affordability problem in flood-prone areas will not be solved by the insurance industry on its own' Mr Trowbridge said. 'A key issue for the Review Panel is whether a system of discounts and funding could be instituted that would enable automatic flood cover to be offered without compromising efforts to minimise flood risk or the capacity of the insurance industry to meet the costs of flood claims.'

The alternative model, Automatic Flood Cover with Opt Out, would clearly increase the number of homeowners with flood cover but, even with the same system of discounts and funding as for the Automatic Flood Cover model, would still leave some insured homes without flood cover.

'We have tried to explain these two models in sufficient detail for experts and consumers alike to be able to offer their considered views on the relative merits of the two models. We are keen to hear from all interested parties on their assessments of these two models. But I stress that they are concepts only and not yet fully developed. The Review Panel has not yet taken a position or a view on any of the matters raised in the Issues Paper pending submissions now being invited on the Paper.'

The Issues Paper also considers whether any new arrangements for flood insurance for homes might be extended to contents, strata title buildings and small business.

Other matters considered in the Paper that have been highlighted by recent natural disasters include non-insurance and under-insurance, consumer awareness and insurance dispute resolution, flood risk measurement and mitigation, and some aspects of government funding of natural disaster relief and recovery.

To assist those making submissions, the Issues Paper sets out a number of questions that highlight issues of particular interest to the Review Panel. However, submissions are welcome on any relevant issues.

The Review Panel will consider all submissions in preparing its report and recommendations for the Assistant Treasurer by 30 September 2011.

The Natural Disaster Insurance Review Panel

Mr John Trowbridge (Chairman)
Mr John Berrill
Mr Jim Minto

National Disasters Insurance Review

 

Letter to the Editor, Australian Financial Review

4 August 2011

In commenting on the interim report of the Queensland Floods Royal Commission, your editorial argues that land planning and insurance are where the biggest changes must be made ('Sensible to accept flood plain reality', August 2).

The Natural Disaster Insurance Review announced by the federal government in March this year is directly addressing all of the issues that you raise: discouraging people from living in flood prone areas, encouraging risk minimisation and sensible decisions about where to live, ensuring adequate flood mapping and seeing people in flood prone areas take out insurance against flooding.

The Review is considering submissions received in response to an issues paper that was released in June. That paper addressed the key issues of the availability and affordability of insurance for flood and other natural disasters. Insurance is a critical part of a community's and an economy's ability to recover from natural disasters and the issues paper put forward two models for improving access to flood cover: automatic flood cover (where flood cover would be standard in all homeowners policies) and automatic flood cover with opt out (where flood cover would be standard but homeowners could opt out).

But the Review is also focused on how to provide incentives to individuals and governments to mitigate the risks to the greatest extent possible. Many of those incentives do not exist now and there is potential through this review to deliver much improved outcomes in the future.

We have heard diverse views from a wide range of interested parties, such as insurers, banks, engineers, consumer groups and private citizens, some of whom were directly affected by the floods and other recent natural disasters. The issues raised are complex and there are many competing interests.

Collectively we have a once in a generation opportunity to fix the risk mitigation and insurance problems. The stories from this year's floods of personal and financial loss, of lack of awareness of flood risks, of people not knowing whether they had insurance cover or spending months in dispute with insurers over whether the damage to their homes was caused by flood or storm, are a repeat of what happened after the 1974 Brisbane floods. My aim and that of my review panel colleagues is to make sure that this level of financial loss and disputation does not happen again.

John Trowbridge
Chairman
Natural Disaster Insurance Review