Insurance brokers are seen as some of the least trusted professionals in Australia — even behind journalists. And seeing increases in premiums cannot help the cause. But, insurers are only able to price and respond to the risks presented to them.
This edition of JNI’s The Big Idea arrives amid major floods in two Australian states, and sees the Insurance Council of Australian make a case for why we need to think differently about natural disasters and how we plan for them.
The impacts of the extreme weather events across Queensland and New South Wales are still coming into focus, with an army of insurance assessors now on the ground helping with claims, where it is safe to do so.
Underinsurance is a significant issue for Australians when disaster strikes. Many policyholders don’t have enough insurance to replace their possessions or rebuild to the same standard as before.
While it is difficult to measure the level of underinsurance in Australia, insurers know that this is a real and significant issue that can affect policyholders’ ability to get back on their feet after an unforeseen event.
In some cases, insurers have no option but to offer a cash payment rather than reinstate what has been damaged or destroyed because the level of insurance the policyholder has chosen to take out will not cover the cost of a repair or rebuild.
Insurers provide tools such as online calculators to help estimate the sum needed to insure, but policyholders may decide to insure a lower sum or may not accurately estimate the replacement value of their property.
Underinsurance is also affected by stamp duty on insurance, which is a retrograde revenue measure that numerous inquiries and reviews have found leads to household underinsurance or non-insurance.
Government taxes and duties can typically range from 20 to 40 per cent on top of the cost of the premium depending on the state or territory.
The ICA urges all state and territory governments to advance tax reform and remove stamp duty and emergency services levies on insurance to improve insurance affordability and drive down levels of underinsurance.
Better mitigation strategies need
Following the 2011 Brisbane floods insurance policies now have a standard flood definition, and 90 per cent of Australian insurers have flood as a standard inclusion in their home and contents policies.
Insurance prices risk, and that means that for those in flood-prone locations flood cover can be costly. That is why the Insurance Council has called on all Australian governments to do more to protect homes, businesses, and communities from the impacts of extreme weather.
On February 22, ICA released its election policy document, Building a More Resilient Australia, which states that the next Federal Government must increase its investment to $200m a year and this must be matched by the states and territories, in line with a 2014 Productivity Commission recommendation.
This investment would include:
- $522 million for local projects such as flood levees to defend regional towns like Lismore and Tweed Heads.
- $413 million to better protect homes against flood, Australia’s most expensive natural peril, by raising utilities and services above the expected flood line.
- $37 million for an improved national flood early warning system, estimated to increase the lead time for flood warnings from 3-5 to 10-15 days.
This $2 billion, five-year investment is projected to reduce financial costs to Australian governments and households by more than $19 billion by 2050.
Measures like those being proposed by the ICA have been shown to decrease the cost of insurance premiums.
Following the construction of a flood levee in Roma, Queensland, premiums dropped by an average of 34 per cent, and a joint program between the Queensland and federal governments to improve the resilience of homes to extreme weather saw reductions of up to 25 per cent.
Insurance premiums can decrease with appropriate mitigation infrastructure or household-level programs, but this can only be achieved if governments act with urgency.