Insurers’ peak body says mitigation spending commitments mark a major shift in the national approach to reducing risk

By John Deex

For more than a decade, the Australian insurance industry has hammered home the message that more investment is needed to mitigate the impact of natural disasters.

Historically, just 3% of disaster spending has been invested in prevention, with 97% of funds used to recover and rebuild after catastrophes strike. It’s neither efficient nor effective.

But on July 1, the Federal Government’s Disaster Ready Fund was launched, fulfilling a pre-election pledge and providing $200 million per year for five years, matched by states and territories.

More than 180 projects – including flood levees, warning systems and education programs – were confirmed in the first round of funding.

While there’s much more to do, the Insurance Council of Australia (ICA) sees the development as an “important milestone” that sends a clear message to the rest of the world.

“These are actions, not words,” Chief Executive Andrew Hall tells Insurance News.

“Australia has had a mindset shift, and we can start running a narrative globally that we are a country focused on reducing risk, we are a country focused on durable building standards that can face the next 100 years of climate variations.

“Insurance is such a globalised product, and it’s going to be really important to demonstrate to markets that we’re doing this.”

That’s not to say that ICA is resting on its laurels. The funding is “a good start”, Mr Hall says, but he wants more. The funds should be locked in for at least 10 years, and indexed so that they don’t reduce in real terms.

“The Government needs to start future-proofing and hard-baking in this type of infrastructure investment,” Mr Hall says.

Insurers had limited input into the first round of projects, but should gain greater influence in future as the Hazards Insurance Partnership, announced in last year’s budget, gets into its stride.

Of course the government money comes with a catch: insurers will be expected to reduce premiums once projects are complete.

Mr Hall says that while insurers will respond where they can, it’s not always that straightforward, with a number of factors feeding into premium calculation.

“I think probably what we need to do is better educate policyholders around the big drivers of premium,” he says.

“They can include factors like global reinsurance, capital, risk appetites, all the way down to how the investment pools are performing, inflation, supply chain costs, even competition.”

He says that as well as mitigating problems we already have, the country needs to stop creating new ones. In other words, stop building on floodplains.

Governments are saying all the right things, but inappropriate developments are still getting the nod, making a mockery of expensive projects to relocate existing at-risk communities.

ICA, Master Builders Australia and the Planning Institute of Australia held a roundtable in July to set out a unified position.

Their recommendations include that planning ministers complete work this year to develop a national standard for considering disaster and climate risk, as agreed by National Cabinet.

“I think we’re inching closer towards getting multi-level governmental agreement,” Mr Hall tells Insurance News.

“Our job now is to bring them all together. We’re going to try to form a consistent narrative at industry level that we can take to government around, what does no more development on floodplains look like? What does responsible land-use look like?

“We’ve got to take it from being these motherhood statements to something that’s actionable.”

Last year’s record-breaking floods put significant pressure on insurers, and the Federal Government has announced an inquiry into the industry’s response.

ICA has welcomed the move – having already commissioned its own independent review led by Deloitte.

The idea for the review came from ICA members, Mr Hall says, “because all members are trying to work out how to maintain a sustainable insurance business in this current economy with all the global capital pressures and reinsurance pressures already coming to bear, on top of what is now a very elevated cost base”.

Bringing in thousands of extra staff to manage the new normal of severe weather events “really challenges the system”, he says, and adds a lot of cost.

While he accepts that responding to customers in such circumstances “is our job, basically”, doing it sustainably is “the real challenge”.

The Deloitte review aims to give a data-driven “line of sight”, showing where improvements are needed.

The findings will also inform the next review of the General Insurance Code of Practice, which is about to get underway.

After last year’s catastrophes, code breaches soared, with “we will tell you about the progress of your claim at least every 20 business days” the most breached obligation. Last year it was breached 17,661 times, up from 12,448 the year before.

While some have labelled the target unrealistic in the face of overwhelming catastrophes, Mr Hall says the industry can’t just suspend its obligations when it suits, and that it could be an area where artificial intelligence assists in the “not-too-distant future”.

ICA believes the government’s flood review should look again at the issue of state insurance taxes, which worsen the issue of affordability, especially in New South Wales which still has an Emergency Services Levy (ESL) on insurance.

Mr Hall says most politicians are “sympathetic to the argument” that the ESL should be removed, but there are practical issues.

“What both sides [of politics] are struggling with is how they replace the revenue. It needs to be done in the context of a more holistic reform of tax in NSW.”

After three years heading up ICA Mr Hall says he has a stronger appreciation for the vital “enabling role” that insurance plays across the economy.

But he still sees plenty of challenges ahead, arguing that we are living through “a period of structural shift in the industry”.

Particularly in home insurance, traditional boundaries are being redrawn, and not everyone has noticed the significance of what’s occurring.

“The shift in the reinsurance market, the frequency of claim rate that’s growing in home, driven by weather, and poor building standards – all those factors now mean that we’re in a period of structural adjustment.

“And I don’t think it’s fully recognised yet, I think people are just hoping that this is a bit of a tough time driven by inflation and a year of bad events.

“But when you dig beneath the surface, and start to understand how the insurance market operates, Australia is part of a global reassessment of risk. We’re at the end of that chain, and we will pay quite a bit for that over the next few years.

“Our job is to better articulate that change to stakeholders and the community more broadly, and how the industry comes together to work on that problem is really exciting and challenging.”