In pursuit of pragmatism
Not happy: flood victims Brian and Lesley Smith at the government inquiry’s official launch in Eugowra, NSW, flanked by Assistant Treasurer Stephen Jones, far left, and local MP Andrew Gee.
Credit: Forbes Advocate
Insurers are set to face the highest level of public scrutiny since the Hayne royal commission as a federal parliamentary committee inquiry into their responses to recent major floods gets underway and residents from disaster-hit communities share their experiences.
Assistant Treasurer and Financial Services Minister Stephen Jones announced the inquiry in July in Eugowra, a small New South Wales town hit by a wall of water that lifted homes from their foundations. The review will include floods that swamped parts of Queensland, New South Wales, Victoria and Tasmania.
It will have a consumer focus and a remit that extends to the broader picture.
“When these natural disaster events hit, they leave trauma behind and social and emotional crises,” Mr Jones says. “They also cause economic crises for the communities affected. Each time, the recovery job is enormous and multifaceted.
“With this knowledge, the terms of reference for this inquiry take a whole-of-economy and social view of the effects of these events.”
MP Andrew Gee, whose federal seat of Calare includes Eugowra, has been a vocal critic of insurers’ reactions to the floods. The former barrister and highly placed National Party federal minister, who quit the party last year over its stance on the Voice, will join the inquiry after pressing for its introduction.
He says the recovery process has been made much harder, and the tragedy much worse, as a result of insurers’ “cold-hearted and shocking response” to policyholders.
“The stories of our disaster-hit residents who faced horrific torrents of water, only to be hung out to dry by their insurance companies, must be heard,” he told Parliament in Canberra.
The Inquiry into Insurers’ Responses to 2022 Major Floods Claims will be conducted by the House of Representatives Standing Committee on Economics, which will report by September 30 next year.
An online survey has been launched, the inquiry is receiving submissions and it will conduct hearings. The insurance industry, regulators, consumer representatives and other groups will have input, and committee members plan to visit regions still recovering from the floods to hear from residents.
Mr Jones and inquiry committee Chairman Daniel Mulino have emphasised they are seeking pragmatic and positive outcomes from the review, which is expected to deliver proposals directed at the industry and government.
Dr Mulino, whose suburban Melbourne electorate of Fraser suffered Maribyrnong River flooding, says the economics committee has conducted other inquiries into sensitive matters in a “constructive, measured and sensible” manner and a similar approach is expected this time.
“There will be some people who do want to vent, and I think that’s fair enough,” he tells Insurance News. “You want it to be partly about people being able to tell their stories, but it’s got to be within a process that is constructive, and that is going to see the committee put in a position where it can come to sensible recommendations.”
The inquiry will seek information on types of cover offered and the way in which insurers communicated with policyholders, resolved claims and dealt with disputes.
It will examine such issues as access to disaster-hit regions, temporary accommodation problems, labour market constraints and supply chain shortages.
Hydrology reports have been included in the terms of reference following confusion and frustration over flood and storm cover as policyholders awaited inundation source assessments.
“Instead of having a smooth claims-handling process, many found themselves in dispute over exactly where the water came from. Was it stormwater run-off or a flooding creek?” Mr Jones says.
“Hydrology reports are expensive, and few people are trained to write them. These reports can cost an individual up to $10,000. That’s money that’s always hard to come by, but when you’ve lost everything it’s impossible.”
The impact of land-use planning decisions and disaster mitigation efforts on cover availability and affordability will be examined, and the inquiry “will have regard to” insurer preparedness for future floods.
The inquiry will consider the findings of other reports, such as an Australian Securities and Investments Commission (ASIC) home insurance claims handling review and a Deloitte review of the industry’s response to the floods, commissioned by the Insurance Council of Australia (ICA).
The council is taking a positive approach to the inquiry, saying any review that supports the ability of insurers to improve how they carry out their crucial function is welcome.
It also points out that three years of La Nina conditions, pandemic repercussions and record-breaking flooding stress-tested systems.
“You want it to be partly about people being able to tell their stories, but it’s got to be within a process that is constructive.”
– Committee Chairman Daniel Mulino
Last year insured losses across all categories totalled $36.5 billion from 5 million claims – meaning one quarter of adult Australians made an insurance claim. The southeast Queensland and northern NSW floods generated about $6 billion in losses.
“We know that there’s been a lot of customers that have had very quick and good outcomes, but there’s also been challenging areas,” ICA Chief Executive Andrew Hall tells insurance News.
“That’s why the industry decided in April to ask Deloitte to look into the performance of the eight largest home and contents providers against all of our obligations, both regulatory and in the code, and really identify the systemic issues, versus probably the more individual cases where something may have gone wrong.”
The industry continues to drive home the message that mitigation is key to longer-term risk reduction, and the reach of the parliamentary inquiry means it will delve into many matters of key interest to insurers in exploring affordability and availability and the impact of flooding.
“That does open up a lot of areas for consideration from a policy perspective, about how this can be mitigated and downward pressure brought on to premiums moving forward and what to do about those communities where there is a real coverage gap emerging because people can’t afford premiums,” Mr Hall says.
On claims handling, ASIC’s report has pointed out areas where improvement by insurers is required. Its review released in August focused on claims lodged with six firms between January and March last year, including catastrophe and other weather-related damage.
The Australian Financial Complaints Authority (AFCA) has also drawn attention to the high level of claim disputes it’s received, with natural catastrophes having cascading impacts into other areas, and has indicted it’s looking at how it might engage with the parliamentary committee.
“The inquiry is an opportunity for all parties to better understand the issues and to find ways forward for the benefit of both consumers and insurers,” Chief Ombudsman David Locke tells Insurance News.
“We recognise there is a range of challenges, but we also believe insurers can do more to improve claims handling and their own internal dispute resolution processes.”
The Actuaries Institute and a consumer group coalition including Choice, the Financial Rights Legal Centre and Consumer Action Law Centre have also highlighted impacts from rising premiums in reports canvassing potential government and industry responses.
The Flood Costs: Affordability, Availability and Public Policy Options report, written and published by the actuaries, targets state taxes on insurance and discusses pools, subsidies and mitigation.
The consumer group’s report, Weathering the Storm: Insurance in a Changing Climate, calls for standard definitions, insurer warnings on potential underinsurance, government subsidies for low-income earners, better hazard information access, and recognition of homeowner resilience action in premiums.
Consumer Action Law Centre Managing Lawyer Philippa Heir, in welcoming the parliamentary inquiry focus, says the industry has to lift its game following the increase in complaints to AFCA.
“I think it’s important the inquiry examines the conduct of insurers to make sure they are complying with their obligations and that they are communicating with their customers effectively and with empathy,” Ms Heir tells Insurance News.
With many of the issues already well canvassed, including in the ASIC report, questions arise over what the parliamentary committee inquiry can additionally bring to the table.
Dr Mulino says the inquiry will be “qualitatively different”, and the public committee process and delivery of the report to Parliament brings an expectation that the Government will respond in a high-profile way.
“Ideally, if we come out of this with unanimous recommendations, that also gives a bit of impetus and can lead to cross-partisan support for the implementation of some or all of the recommendations.”
The review sits alongside the Albanese Govern-
ment’s broader program of work on insurance access and affordability, including the commitment to spend $1 billion on mitigation over five years through the Disaster Ready Fund.
Some findings will be relevant to other natural disasters as Australia faces rising risks from a range of perils that can bring surges in claims.
Mr Jones says the climate is changing, severe weather events are going to be more frequent, and it’s important to look at the underlying risk while also getting “the insurance piece right” and ensuring “less sting and pain” in the process.
“Some losses can’t ever be replaced. But when people are suffering, when things have fallen apart, they’re entitled to expect that the recovery won’t be made harder than it needs to be,” he says.
“They’re entitled to a process that is as simple, efficient and compassionate as possible.”
A “new normal” of more frequent severe weather events will require insurers to be better prepared, the Australian Securities and Investments Commission (ASIC) says in a claims handling review conducted amid ongoing flooding.
The regulator looked at data from more than 218,000 claims lodged between January and March last year. Six insurers that cover 63% of the home insurance market by annual gross written premium were involved and information included progress on the claims up to September last year.
The review, Navigating the Storm: ASIC’s review of home insurance claims, finds shortcomings in communications with consumers; project management and oversight of third parties; handling of complaints and expressions of dissatisfaction; identification and treatment of vulnerable consumers; and resourcing of claims handling and dispute resolution.
“An insurance claim doesn’t have to be handled perfectly, but it must be handled well,” ASIC Deputy Chair Karen Chester says. “Importantly, all five areas we’ve identified for improvement are within the insurers’ control.”
Some 43% of the claims examined relate to severe weather events, with most from the NSW and Queensland floods in February and March The remainder were from other non-severe weather events.
Wear and tear and maintenance exclusions were identified as an issue for further examination, following similar concerns raised in a General Insurance Code Governance Committee report. Frustration around communication was also apparent throughout the claims handling process.
“Insurers can pre-empt some frictions by ensuring that consumers understand what their policy covers, any exclusions that apply and what to expect when claiming on their policy,” ASIC says.
“This extends to information in disclosure documents, websites, marketing and call scripts.”
ASIC proposes insurers should prepare for disasters by “proactively uplifting resourcing” rather than scaling up once an event has happened, and should permanently enhance claims handling and dispute resolution systems, practices, resourcing capacity and responsiveness.
Given the increasing regularity of severe weather disasters, claims from events are overlapping. There doesn’t appear to be a substantial “quiet period” between events, and issues caused by record flooding may not be a one-off, the regulator suggests.
“We recognise insurers had to operate in difficult times; however, insurers should expect that similar circumstances will arise in the future and need to be prepared to meet their claims handling obligations,” ASIC says.