ICA Response to the Report to the Council of Australian Governments on Natural Disasters in Australia

Transcription

1 ICA Response to the Report to the Council of Australian Governments on Natural Disasters in Australia Insurance Council of Australia Limited March 2006 ABN: Level 3, 56 Pitt Street SYDNEY NSW 2000 Phone: Fax:

2 Contents 1 Introduction Executive Summary Recommendations Response to COAG Report Non-Insurance Recommendations Accurate Flood Mapping Effective Flood Mitigation Effective Land Use Planning and Building Controls Natural Disaster Relief Adequate Disclosure to Residents and Education Insurance Recommendations Recommendations 64 and Recommendation Conclusion and Next Steps Appendix A: International Experience Overview US National Flood Insurance Program (NFIP) Appendix B: List of Reports on Enclosed CD Insurance Council of Australia Page 2

3 1 Introduction The Insurance Council of Australia (ICA) is the representative body of the general insurance industry in Australia. ICA membership represents more than 90 percent of total premium income written by private sector general insurers. ICA members provide non life insurance products ranging from those usually purchased by individuals (such as home and contents insurance, travel insurance, motor vehicle insurance) to those purchased by small businesses and larger organisation (such as product and public liability insurance, workers compensation, commercial property, and directors and officers insurance). ICA members, both insurers and reinsurers, are regulated and licensed by the Australian Prudential Regulation Authority (APRA) and are a significant part of the financial services system. Recently published statistics from APRA show that the private sector insurance industry generates direct premium revenue of $28.4 billion per annum and has assets of $80.1 billion. 1 The industry employs about 43,000 people. Australian general insurers issue more than 41 million insurance policies annually and deal with 3.5 million claims each year. 2 On average, about $55 million in claims is paid each working day. 1 APRA, Quarterly General Insurance Performance, June APRA Selected Statistics on the General Insurance Industry, Year Ending June 2002 Insurance Council of Australia Page 3

4 2 Executive Summary The release of the High Level Group s Report on Natural Disaster Management, and COAG s subsequent endorsement of that report provides ICA with an excellent opportunity to contribute to the policy debate by responding to the report s recommendations, including those that relate directly to insurance. The role of general insurance in covering risk and protecting property plays a major part in underpinning the country s economy and puts it in a unique position to respond to natural disasters and to assist in returning policyholders both commercial and domestic to the position they were in before the disaster and ease the demands on taxpayer funded relief payments. The insurance industry is concerned to make sure that, subject to the availability of relevant information and regulation, it is able to offer the community the cover that it needs at a price that is equitable and affordable. The industry believes that, to a large measure, it achieves this in respect to most natural disasters, including earthquake, bushfire, hailstorm and windstorm. In its submission to the COAG inquiry in 2001, ICA identified flood as the most important community exposure not met by insurance and highlighted a number of issues outside the industry s control, which had contributed to the lack of flood cover, and that needed to be dealt with by governments at all levels: Accurate and consistent flood mapping; Effective flood mitigation; Effective planning controls in flood prone areas; and Adequate disclosure to residents in flood-prone areas and public education. Many of these issues are addressed in the COAG report and recommendations, although ICA has a number of concerns, particularly related to the implementation of these recommendations. The report provides a comprehensive set of recommendations for developing initiatives relevant to both before and after disasters occur. However, there seems to be a need for further clarification of how accountability for carrying out these recommendations will be monitored and how timeframes will be enforced. For example, it is imperative to fast track the development of a nationally consistent quality risk data source for Australia s exposures to all natural disasters and that priority should be given to flood and other water related perils. This data should be held within a central Australian government agency and should be publicly available so that all stakeholders are aware of the risks. ICA and the industry, believes that Australia is in a better position in 2006 to find a solution to the flood insurance issue than it has ever been. There are improved (if still diverse) sources of data, and technological advances have made it possible for insurers, Governments, and individual households to have a better understanding of exposure to flood risk. Fundamental to finding this solution, however, will be a willingness and commitment from Governments at all levels to cooperate and work with industry in developing this solution. Insurance Council of Australia Page 4

5 Flood is not purely an insurance issue, it is a community issue and international experience clearly shows that governments and communities must be integral partners in any solution. As part of its commitment to finding a solution, ICA has completed or commissioned a number of research projects, including: An estimate of the number of residential properties vulnerable to a 1 in 100 year Average Return Interval (ARI) flood, or having a 1% likelihood of flooding in a given year; A preliminary investigation of the number of addresses subject to storm surge and other forms of coastal inundation; A review of average annual claims costs associated with riverine flood; and An analysis of international experience in dealing with this issue. From this, ICA has built a picture of the size of the flood problem in Australia in the context of insurance. There are 169,620 residential properties (representing about 2.4% of Australia s 7.1 million households) susceptible to riverine flooding in the 1 in 100 year zone, which means there is a 1% chance of being flooded each year. These properties are concentrated in Queensland (36%) NSW (33%) and Victoria (25%). Half of the flood-prone properties are concentrated in 12 regions/cities and 80% are located in 60 regions/cities. 3 Further extrapolation shows there are 58,000 homes in the 1 in 20 risk zone and 454,000 homes within the Probable Maximum Flood zone, defined as the most extreme event based on the maximum potential rainfall for a given area. In general, this is seen as a 1 in 10,000 year event. There are also 711,000 addresses (both residential and commercial) that are within 3 kilometres of the coast and below 6 metres elevation, which are vulnerable to coastal inundation, of which 60% are located in NSW and Queensland. 4 Flood is different to other perils covered by household insurance eg burglary fire and storm. While variations in crime rates do exist and insurers do use their claims experience to rate for higher incidences of burglary claims or indeed storm claims in particular areas, all insured properties face some risk of burglary and damage by fire or storm. This is not the case with flood. Less than 6.4% of households are subject to even the most extreme flood risk, the probable maximum flood (PMF). Insurance works on the principle of spreading risk over a large number of policyholders who face similar potential losses. Pooling the premiums of the many to pay the claims of a relatively few keeps premiums at a reasonable level. In general, premiums reflect the level of risk each policyholder brings to the pool. The small number of homes vulnerable to flooding means the risk is spread over a relatively small group and therefore the cost of cover for each home would be very high. 3 Risk Frontiers, An estimate of the number of residential properties in Australia liable to inundation by an ARI 100-year flood, a report prepared for the Insurance Council of Australia, July 2005 (Revised March 2006). A copy of this report is available on the CD enclosed with this submission. 4 Risk Frontiers, A national coastal vulnerability study, a report prepared for the Insurance Council of Australia, February A copy of this report is available on the CD enclosed with this submission. Insurance Council of Australia Page 5

6 Actuarial calculations find that the average annual cost of residential flood damage in Australia is $350 million, with the bulk of this falling on the highest risk households. A similar figure for coastal inundation is not available due to a lack of data. Based solely on riverine flood, it is estimated that: For those houses with a greater than 5% likelihood of riverine flood every year (within a 1 in 20 year ARI), the annual average cost of flood damage per household is $3,900; and For all houses with a greater than 1% likelihood of riverine flood (within the 1 in 100 ARI) the annual average cost per household is $1, Australian authorised insurers are subject to strict prudential regulation that requires them to maintain sufficient reserves to meet expected claims costs. It would not be possible to increase the financial burden on consumers by charging the required level of additional premium on home and contents policies already costing on average $400 to $600, without increasing the already high levels of underinsurance and non-insurance in the community. ICA estimates that as many as 70% of households in Australia are underinsured by between 70 and 90% and as many as 25% of households have no home or contents insurance. 6 Flood insurance is an issue in most OECD countries. Solutions have varied from agreements between industry and Government to mandated coverage backed by Government pools and a variety of options in between. 7 International experience shows that any solution to flood must involve a partnership between industry and Government. The insurance industry is of the view that it can offer insurance cover for riverine flood risks faced by 97.6% of homes in Australia, to a standard definition. For the remaining 2.4% of homes (ie, those subject to a greater than 1% likelihood of flooding), such coverage would be unaffordable under a pure insurance model. ICA believes that these risks should form the base for a joint industry-government flood solution that effectively links insurance to availability of quality data, investment in mitigation, restrictions on land use and development and natural disaster relief payments. In this regard, ICA sees a number of lessons that can be learned from the United States National Flood Insurance Program (NFIP). There is a further, as yet undefined, exposure to coastal inundation that is not covered in most insurance policies and that ICA believes should be addressed as a second phase to the proposed flood solution. With this submission, ICA proposes that COAG and the Australian Government work with the insurance industry to solve this important community concern in a way that will provide seamless flood cover to all consumers of home and contents insurance in Australia. ICA believes that the environment is right and the time is now for Australia to finally solve this important community issue. 5 Finity, Indicative Risk Premiums for Riverine Flood, a report prepared for the Insurance Council of Australia, March A copy of this report is available on the CD enclosed with this submission. 6 Insurance Council of Australia, Report On Non-Insuranc e / Under-Insurance In The Home And Small Business Portfolio, October 2002 available at 7 An overview of ICA s findings in reviewing international experience is available in Appendix A. Further detail on international experience in Europe and the United States can be found on the CD enclosed with this submission. Insurance Council of Australia Page 6

7 3 Recommendations ICA makes the following recommendations in relation to the COAG Report on Natural Disasters and related initiative to ensure the availability of insurance coverage for flood. Non-Insurance Recommendations 1. ICA recommends that insurance representation be considered for working groups formed to implement the COAG recommendations that are dealing with mitigation, land use, and risk assessment data, as well as the recently formed National Flood Risk Advisory Group (NFRAG). 2. ICA recommends that a formal liaison process be established to keep insurers informed on developments in areas of flood mapping, mitigation and land use, community awareness and disaster relief. 3. ICA recommends that the Australian Government fast track the implementation of COAG commitments to create a central, nationally consistent source of risk data for flood and related perils, and ensure that such data is updated regularly, that it is available on a house-by-house basis and is accessible to the public. 4. ICA recommends that minimum mitigation standards be set based on national risk maps and that appropriate effectiveness measures, incentives and penalties be developed to ensure that such standards are met on an ongoing basis. 5. ICA recommends that minimum development and land use standards be set based on national risk maps and that appropriate effectiveness measures, incentives and penalties be developed to ensure that such standards are met on an ongoing basis. 6. ICA recommends that funding for natural disaster relief be reviewed to ensure that it does not provide a disincentive for the purchase of insurance and that consideration be given to the use of disaster relief as a greater incentive for community and individual mitigation actions. 7. ICA recommends that a core element of jointly improved national practices in community awareness and eduction be standards and requirements to ensure adequate disclosure to residents of their risk to various hazards as determined through national agreed risk maps. Insurance Recommendations 8. ICA recommends that COAG and the Australian Government work with the general insurance industry to develop a joint industry-government insurance solution for flood and related perils. 9. ICA recommends that the proposed joint industry-government insurance solution focus primarily on those homes that are at the highest risk of flooding and where affordability of insurance cover is most significant (within a 1 in 100 ARI or 1% likelihood of flood). 10. ICA recommends that national standards for mitigation and land use also be built into the solution and that such standards include effective incentives and controls. 11. ICA recommends that, subject to the availability of effective risk assessment data, the goal of the proposed joint industry -government insurance solution be to offer coverage to a standard definition of flood that would provide for a seamless product to consumers of home and contents Insurance Council of Australia Page 7

8 insurance and remove any disputes as to the cause of water damage from natural causes. 12. ICA recommends that a key role of the proposed joint industry-government insurance solution be communications and community awareness around Flood Risk based on nationally consistent risk maps. 13. ICA recommends that disclosure of known flood risks on property title documents be mandatory throughout Australia. 14. ICA recommends that the development and regular update of nationally consistent risk maps be at the heart of the proposed joint industry-government insurance solution and should include address-based information based on a variety of risk zones including 1 in 20, 1 in 50, 1 in 100, 1 in 250 and 1 in 500. Such maps should be used as the basis for setting minimum standards for mitigation and land use, as well as for insurance pricing within the highest risk areas. 15. ICA recommends that the collection of raw data is primarily the role of government because of its importance to many stakeholders other than the insurance industry. Any consideration of financial contribution by the insurance industry be considered only in the context of a joint industry -government insurance solution. More detailed discussion on each of these recommendations follows under section 4 of this submission. Insurance Council of Australia Page 8

9 4 Response to COAG Report 4.1 Non-Insurance Recommendations In its submission to the COAG inquiry in 2001, ICA identified flood as the peril of most concern to its members and indicated that there were issues outside the industry s control, which had contributed to the lack of flood cover. The submission identified a number of key issues which ICA believed needed to be dealt with by governments at all levels: Accurate flood mapping; Effective flood mitigation; Effective planning controls in flood prone areas; and Adequate disclosure to residents in flood-prone areas through access to data and public education. Many of the issues that ICA raised in its 2001 submission are addressed in the final COAG report and recommendations, although ICA has a number of concerns particularly related to the implementation of these recommendations. Exhibit 2 below provides an overview of ICA s understanding of the working group structures that have been put in place to implement the recommendations. Exhibit 2 COAG Structure Council of Australian Governments Local Government and Planning Ministers Council (PM & Premiers) Augmented Australasian Police Ministers Council (Attorney-Generals Emergency Services focus) Green = recommendations of relevance to insurers Yellow = other recommendations Ministerial Meeting on Insurance Issues Not currently engaged but could be National Flood Risk Advisory Group (NFRAG) Chair: Hori Howard Data Collection & Risk Assessment (Commitment 1 & 2/Rec 11, 39-40) Geosciences Australia & DOTARS Trevor Jones (02) Technical Risk Assessment Advisory Committee (TRAAC) Australian Emergency Management Committee (AEMC) (inter-governmental group made up of senior officials usually in charge of respective emergency management committee) Emergency Management Australia Secretariat COAG Working Groups Mitigation, Land use Planning & Building Control (Commitment 3,4,5, 12/Rec 5-25, 32 38) DOTARS John Lauder (02) Natural Disaster Relief Arrangements (Commitment 6, 8, 9/Rec 41-49) DOTARS Kevin Reece (02) Min. for Transport & Regional Services Opportunity to get Insurance Ministers engaged Insurance (Rec 64-66) Treasury Pascal Mercelis (02) Indigenous Communities (Rec 59-63) AEMC Working Group RICAC Andrew Coughlan (03) Community Awareness (Commitment 7/Rec 26-31) EMA Morrie Bradley (03) Volunteers (Commitment 10/Rec 58 a-d) EMA Justine Rixon (02) Catastrophic Disasters (Rec 56, 57) Victoria (EMA as secretariat) Tony Pearce (03) Insurance Council of Australia Page 9

10 There are a wide range of initiatives and groups that have been set up under the COAG umbrella and it is important that the insurance industry be formally included in some of these groups. Of most importance to addressing concerns around the availability of insurance for flood and other natural disasters is community awareness, the availability of quality and consistent data and effective monitoring, controls and accountabilities related to mitigation and land use. A summary of findings from recent research into how each of these elements is currently addressed in the three most flood prone States New South Wales, Victoria and Queensland is available on the CD enclosed with this submission. ICA recommends that insurance representation be considered for working groups formed to implement the COAG recommendations that are dealing with mitigation, land use, and risk assessment data, as well as the recently formed National Flood Risk Advisory Group (NFRAG). ICA recommends that a formal liaison process be established to keep insurers informed on developments in areas of flood mapping, mitigation and land use, community awareness and disaster relief Accurate Flood Mapping In its initial submission to COAG, ICA called for central, state-based, or national repositories containing all relevant floodplain information to assist government agencies, private consultants, independent researchers, the insurance industry and the community generally. ICA also argued for increased funding for natural disaster risk management studies and recommended that a working party of State and Local Government representatives should be established to undertake a national review of flood study information in order to establish National Standards for Flood Data. Within the COAG recommendations, commitments 1 and 2, recommendations 11, 39 and 40 all relate to data collection and risk assessment. In addition, recommendation 6 calls for the $9 million per annum Natural Disaster Risk Management Studies program to be wrapped into the broader Disaster Mitigation program. In particular, commitments 1 and 2 refer to the development and implementation of a national program of systematic and rigorous disaster risk assessment and the establishment of a nationally consistent system of data collection, research and analysis to ensure a sound knowledge base on natural disasters and disaster mitigation. ICA understands that work is being done through the Department of Transport and Regional Services, together with Geoscience Australia, to understand available risk information and to scope out necessary work to effectively quantify Australia s exposures to natural disasters. This research confirms findings of the Risk Frontiers study that raised significant concerns around the quality and consistency of available risk data for riverine flood. International experience clearly demonstrates that a core element of any disaster or flood insurance solution is the existence of a central source of consistent and quality risk maps that form the basis for mitigation and land use planning, as well as for insurance risk pricing. While insurers may opt to supplement national flood map data, it is critical that a central agreed source of risk data exists and that this source is updated regularly to reflect new development and mitigation activities. Insurance Council of Australia Page 10

11 ICA believes it is imperative to fast track the development of a nationally consistent quality risk data source for Australia s exposures to all natural disasters and that priority should be given to flood and other water related perils. This data should be held within a central Australian government agency and should be publicly available so that individual homeowners, communities, insurers and other government agencies are aware of their risks. Risk information should be available on a house-byhouse basis, as well as by post code and local government area and should reflect different return intervals (1 in 20, 1 in 50, 1 in 100, 1 in 250, 1 in 500). ICA recommends that the Australian Government fast track the implementation of COAG commitments to create a central, nationally consistent source of risk data for flood and related perils, and ensure that such data is updated regularly, that it is available on a house-by-house basis and is accessible to the public Effective Flood Mitigation In its initial submission to COAG, ICA recommended that the Commonwealth consider increased funding for the Regional Flood Mitigation Program. Related to this ICA also recommended that an Information resource package for state and local authorities be developed to outline obligations in flood mitigation and eligibility criteria for Federal funding under relevant programs. Within the COAG recommendations, flood and other natural disaster mitigation is addressed in commitments 3 and 5, which are supported by recommendation 5 outlining the respective roles and responsibilities of the different levels of government, and recommendations 6 to 10 and 32 to 38. The commitments call for disaster mitigation strategies at all levels of government and support costeffective natural disaster mitigation measures through a new $75 million per annum Disaster Mitigation Australia Package and continuation of the Regional Flood Mitigation Program at its current funding level of $28.8 million per annum. While ICA supports these initiatives, it is aware that a number of concerns have been raised around their implementation and effectiveness. One of the most common concerns raised relates to the funding formula. In the first place, it is important to recognise that the funding is granted annually and is limited to a five-year period, although some carry over provisions may exist. Secondly, the Commonwealth funding requires matching dollars from the State and Local Government levels. Many local governments simply do not have the resources to support major investments in mitigation, even when those dollars are matched with State and Commonwealth funding. Anecdotally, ICA has also heard that a lack of funding and commitment from certain State governments has affected Local Government s ability to attract funding from Commonwealth programs. Funding made available at State levels varies significantly between the States. As an indication of this, Commonwealth funding to date under the Regional Flood Mitigation Program for New South Wales and Queensland has been $24 and $20.5 million respectively, while spending in Victoria is only $3 million. Clearly some of this divergence reflects the differences in flood risks in the respective States, however, recognising that Commonwealth funding must be matched by state funding this divergence does give some indication of challenges that may exist for Local Governments in getting State funding. Insurance Council of Australia Page 11

12 Further concern comes from confusion and a lack of understanding of the different roles and responsibilities within the States and the lack of any nationally consistent standards or effectiveness measures. This is compounded by the lack of nationally consistent quality risk data on which to base mitigation decisions. While significant work is done in mitigation at all levels of government, ICA is not aware of any national minimum standards or controls and monitoring of the effectiveness of mitigation activities. Similarly, ICA is not aware of incentives or penalties to encourage Local Governments to make necessary or effective mitigation investments. Currently, the financial loss felt by individuals and communities from a flood or related event that is not covered by insurance acts as the ultimate mitigation incentive. A significant concern for insurers, and a core element of most international solutions, is to ensure that effective standards, controls and measures are put in place to ensure appropriate investments in maintaining and developing new mitigation measures. ICA recommends that minimum mitigation standards be set based on national risk maps and that appropriate effectiveness measures, incentives and penalties be developed to ensure that such standards are met on an ongoing basis Effective Land Use Planning and Building Controls In its initial submission to the COAG review, ICA recommended that the Australian Government draft a Memorandum of Understanding between the Commonwealth and the States to prohibit or limit Local Government from approving the development of flood prone land where there is, according to a national standard, reasonable chance of recurrent flooding. COAG commitment 4 and recommendations 12 to 25 relate to land use planning and building codes. In particular, commitment 4 is to take action to ensure more effective statutory land use planning, develo pment and building control regimes that systematically identify natural hazards and include measures to reduce the risk of damage from these natural hazards. ICA strongly supports this commitment and agrees that the recommendations cover all of the areas where action is necessary and required. ICA is concerned, however, that the recommendations fail to meet this commitment in a meaningful way and that the timeframes for meeting these recommendations have already slipped. For example: Recommendation 12 is that Local Government and Planning Ministers Council consider the Planning for Safer Community guidelines, but provides no compulsion or incentive and no penalty if they fail to do so; Recommendation 13 is that the Local Government and Planning Ministers Council require the introduction, within a timeframe of one year (emphasis added), of arrangements to ensure natural hazards, including floodplain management objectives, are fully considered in the land use planning legislative frameworks of all levels of government, but again there are no control provisions and no minimum standards or requirements; Recommendation 14 is that State and Territory jurisdictions introduce statutory land use planning policies and requirements governing development in areas which are subject to a significant risk of flood, bushfire, cyclone, landslip and storm surge, within a two-year timeframe, but there is no attempt to coordinate such policies across the different states or address any possible deficiencies in these policies; and Insurance Council of Australia Page 12

13 Specifically related to flood, recommendation 35 is that State, Territory and Local Governments must be implementing and themselves complying with land use planning and building controls to ensure they are not creating future flood risks, but it fails to set out minimum standards or penalties if governments do not comply. As in mitigation, such planning and development controls are critical to risk reduction and must be an integral part of any insurance solution. It is only through national standards and measures that effective controls can be put in place to prevent further development in high risk areas. ICA recommends that minimum development and land use standards be set based on national risk maps and that appropriate effectiveness measures, incentives and penalties be developed to ensure that such standards are met on an ongoing basis Natural Disaster Relief A significant focus of the COAG report on Natural Disasters in Australia was focused on Natural Disaster Relief Arrangements. These include Commitments 6, 8 and 9, as well as recommendations 41 to 49. While ICA did not make comments in this area within its 2001 submission, the issue is of importance in the discussion around natural disaster insurance. In many respects disaster relief payments are an alternative to insurance and in this regard it is important to ensure that the availability of such relief does not become a disincentive for individuals to purchase insurance. Recent experience with bushfires has raised this issue as individuals who held insurance were in some respects penalised as they received less funding through disaster relief than those who were not insured. Although the difference in funding was nominal, the principle remains that disaster insurance should not be perceived as a disincentive to the purchase of insurance. Disaster relief payments can also be used as an incentive for Local Governments to take action in effective floodplain management and for individuals to purchase insurance. To this end, ICA was pleased to see recommendation 45 of the COAG report that argued for the NDRA be amended to provide a more effective incentive for Local Governments to undertake disaster mitigation, by imposing a deduction of 10 percent in available disaster relief assistance for any Local Government not having disaster mitigation strategies in place and being implemented for their area by December ICA believes that this same form of incentive or penalty could be used more aggressively by including some level of minimum standards and quality checks for such disaster mitigation strategies and that these could be extended to individuals as an incentive to take out insurance. In the United States, for example, access to federal infrastructure related disaster assistance is restricted to those communities that have agreed to provide quality flood maps and meet minimum standards for land use and mitigation. At the individual level, any individual who has received natural disaster assistance must maintain flood insurance coverage for as long as they live in the dwelling. ICA recommends that funding for natural disaster relief be reviewed to ensure that it does not provide a disincentive for the purchase of insurance and that consideration be given to the use of disaster relief as a greater incentive for community and individual mitigation actions. Insurance Council of Australia Page 13

14 4.1.5 Adequate Disclosure to Residents and Education In its 2001 submission, ICA highlighted that irrespective of insurers needs, the community had a right to know whether it is located in an area that is prone to flooding. This would allow individuals to make a judgement as to whether they should take the risk of living in such an area. While significant progress in the area of community awareness has been made in some jurisdictions within Australia, there is still no universal awareness of flood risk. The COAG recommendations related to community awareness (Commitment 7 and recommendations 26 through 31) focus primarily on emergency response and warning systems. Having said that, they can provide a basis to ensure effective disclosure of hazard risk to residents and education around mitigation and development. ICA recommends that a core element of jointly improved national practices in community awareness and eduction be standards and requirements to ensure adequate disclosure to residents of their risk to various hazards as determined through national agreed risk maps. 4.2 Insurance Recommendations Section 11 of the COAG report discusses the role of disaster insurance and makes a number of recommendations aimed specifically at insurers. While the discussions refer to natural disasters overall, specific emphasis is given to flood as a priority concern to be addressed. The discussion recognises the complexities associated with insurance coverage for natural disasters and sets out a shared goal to make sure that insurance is both an affordable and effective tool for households and businesses and competitive and profitable for insurers. The general insurance industry is committed to offering effective cover for natural disasters for households and businesses in a manner compatible with prudential requirements and the commercial imperatives faced by individual insurers. All Australian insurers generally offer coverage for earthquake, fire, lightning, storm, hail and cyclone. Most insurers have exclusions for action of the sea and storm surge, erosion, subsidence and landslide, although a very limited few insurers offer coverage for action of the sea as part of their flood coverage. To understand the level of flood coverage in Australia, ICA undertook a review of policy disclosure documents offered by 21 member companies throughout Australia. Based on this analysis: Two insurers, accounting for a small percentage of the market, cover full water damage including sea/tidal water. Six insurers cover riverine flood as part of a standard product, specifically excluding water damage caused by sea/tidal water. An additional four insurers offer a flood option for an additional premium. The flood option is limited to riverine flood. A number of companies cover what they term flash flooding, generally meaning flood caused by a short, intense storm. This is usually time bound and in some cases the coverage is limited in terms of dollar amount or has higher excess terms. Insurance Council of Australia Page 14

15 In commercial property an option for flood cover is generally available for larger contracts, subject to a risk assessment. Where riverine flood cover is included it is often not available in high-risk areas because the premium would be unaffordable. The following sections provide direct responses to the recommendations in section 11 of the COAG Natural Disaster Report Recommendations 64 and 65 That COAG notes that the proposed Disaster Mitigation Australia Package and the further measures proposed to advance disaster mitigation meet the call from the insurance industry to improve disaster risk assessment and mitigation and will benefit the insurance industry. That COAG endorse the following statement of the desired role of the insurance industry: Insurers have a responsibility to offer effective cover for natural disasters encompassing all hazards for households and businesses at fair and competitive premiums (emphasis added). ICA Response ICA looks forward to the full implementation of the proposed Disaster Mitigation Australia Package and notes that success in mitigation and risk assessment will require effective timeframes and longterm commitment from all levels of government. ICA has raised a number of concerns in relation to certain recommendations in that package in section 4.1. The general premise behind recommendation 64 and the introductory discussion in section 11 is the assertion that, provided governments create the right conditions then insurers should simply offer the coverage. ICA is concerned that these statements could be interpreted as meaning that the lack of availability and affordability of insurance coverage for flood and other natural disasters is solely an insurer problem and that it is incumbent upon insurers to solve this problem. In an environment where both the sale and purchase of insurance are entirely voluntary and are subject to normal market forces of competition, overlaid by stringent prudential and market conduct and disclosure requirements, it is difficult to accept the over simplification of this recommendation which says it is insurers responsibility. The insurance industry is concerned to make sure that, subject to the availability of relevant information and regulation, it is able to offer the community the cover that it needs at a price that is equitable and affordable. The Australian general insurance industry believes that to a large measure it achieves this in respect to most exposures to natural disaster, including earthquake, bushfire, hailstorm and windstorm. However, it is pertinent to note that price sensitivity is a key factor in consumers purchasing decisions and that the level of non-insurance and underinsurance in Australia is a relevant problem significantly influenced by government attitudes to the taxation of those prudent enough to purchase insurance to protect themselves from these risks. Insurance Council of Australia Page 15

16 In a 2001 survey on non-insurance and underinsurance, ICA found that: Approximately 20% of home buildings were insured for between 70% and 90% of their replacement value; and An estimated 25% of households in Australia were without home or contents insurance. For insurance to be Available and Affordable, certain conditions need to exist in a competitive market. Those core principles can be summarised by the mnemonic BASIC MUD B A S I C Big enough Book of business (i.e., sufficient volume to allow for the spreading of risks). Adverse selection 8 minimized through good knowledge of each risk. Sustainable over a number of years for various future scenarios. Information from credible sources about hazard, vulnerability, exposure and claims. Consistent with existing insurance practices, systems, customs and law. M U D Moral hazard 9 is low and manageable. Uncertainly about loss must exist if or when event will occur, or how much it will cost. Demand for insurance must exist (or have potential to be created) and must be effective. I.e., there must be enough customers prepared to pay the price that insurers need to charge for providing sustainable insurance. Source: David Crichton, Residential Flood Insurance: Lessons from Europe, in Residential Flood Insurance: Implications for Floodplain Management Policy, edited by David Ingle Smith and John Handmer, 2002, p. 43. For flood and coastal inundation, including storm surge, tsunami, or action of the sea, these conditions do not exist. Nevertheless, the insurance industry has long recognised that this is probably the most important community exposure not met by insurance. 10 This situation prevails in every OECD jurisdiction ICA has examined, but governments in partnership with industry have constructively addressed it. Development of an industry wide solution to provide flood cover is a top priority for ICA in But industry cannot solve this problem alone and a solution requires government commitment as per Recommendation 64. ICA recommends that COAG and the Australian Government work with the general insurance industry to develop a joint industry-government insurance solution for high risk flood and related perils. 8 Adverse selection occurs when the customers knows more about the risk than the insurer, or where the insurer has failed to recognize the extent of the risk with adequate premium levels, then the customer selects against the insurer. The insurer is left with costs for which it has not received sufficient premium also known as unfunded liabilities. 9 Moral hazard occurs when an individual s incentive to mitigate against risk is lessoned as a result of holding insurance against that risk. 10 Note that some cover is available but it is not universal and there are generally restrictions that would limit availability in high risk areas. Insurance Council of Australia Page 16

17 Active engagement and leadership is critical at the Federal level because: o Flood is a community issue. Development has been permitted in areas that are regularly subject to flooding, creating significant affordability issues for those households within high-risk areas. As is pointed out in the United States in its National Flood Insurance Program (NFIP), there is a general community obligation to support those in the highest risk areas on the basis that individuals are not directly responsible for planning controls, river systems etc and that there is a broader community impact; o Flood is a multi-government issue. Responsibility for critical elements of flood mitigation and land use rests with all levels of government and these issues are addressed differently both between the States and amongst Local Governments within a given State; and o Economic benefits of flood insurance go beyond direct benefits to insured individuals and include reduced disaster relief funding, infrastructure costs, improved aggregate consumption post the event, and an acceleration of recovery after a disaster Recommendation 66 That COAG endorse the following specific actions it expects of the insurance industry in order to achieve an improved national approach to flood and other natural disaster insurance. The following sections address each of the actions outlined in recommendation 66 grouped according to the issues they address. The lettering reflects the order of the action points outlined in recommendation 66. Mitigation Availability and Affordability a) Ensure the availability and affordability of all natural hazard/natural disaster insurance as part of standard insurance policy cover. d) In communities where mitigation has taken place, provide access to all hazards insurance against natural disasters, including riverine flooding and cyclones, at fair premiums. ICA Response As noted in the response to recommendation 65, the industry covers most natural disasters and is working towards providing coverage for flood. It should be noted, however, that the proper conditions for underwriting must be in place. And effective mitigation is one critical element, as is the existence of strict controls on future land use and development. On page 79, the COAG report says: Insurers have a responsibility to offer effective cover for natural disasters encompassing all hazards for households and businesses at fair and competitive premiums. It goes on to say: Premiums would not need to reflect flood risk, except in areas at high risk of frequent flooding, where a loading or excess could be applied as is the case for areas of high household property crime. Insurance Council of Australia Page 17

18 However, there are a number of reasons why the issues surrounding the universal provision of insurance cover for an event such as mainstream flooding, are much more complex than adjusting premiums to deal with burglary. While variations in crime rates exist and insurers do use individual s claims experience to rate for higher incidences of burglary claims or indeed storm claims in particular areas, all insured properties face some risk of burglary and damage by storm. This is not the case with flood. Research shows that less than 2.4% of Australia s 7.1 million households are subject to high risk riverine flooding and only 6.4% are subject to a probable maximum flood event, defined as the most extreme event based on the maximum potential rainfall for a given area. In general, this is seen as a 1 in 10,000 year event. Insurance works on the principle of spreading risk over a large number of policyholders who face similar risks and pooling the premiums of the many to pay the claims of a relatively few, therefore keeping premiums at a reasonable level. In general, premiums reflect the level of risk each policyholder brings to the pool. In addition, while damage to individual houses by events such as storms and bushfires is random in its impact, flood damage to buildings in flood zones is inevitable once a certain amount of rain falls. The small number of homes vulnerable to high frequency flooding means the risk is spread over a relatively small group and therefore the cost of cover for each home would be very high. Actuarial calculations find that the average annual cost of residential flood damage in Australia is $350 million, with the bulk of this falling on the highest risk households. A similar figure for coastal inundation (ie, storm surge and tsunami) is not available at this point due to a lack of risk data. While there is some limited information on vulnerability to coastal inundation, this information is not sufficient to provide an estimate of the annual costs. Further research is required. Based solely on riverine flood, it is estimated that: For the most flood-prone areas (a greater than 5% likelihood of riverine flood every year or within a 1 in 20 year ARI, the annual average cost of flood damage per household is $3,900; and For all houses with a greater than 1% likelihood of riverine flood (within the 1 in 100 ARI) the average cost per household is $1,900. This cost, when added to insurance premiums, would also be subject to GST, stamp duty and Fire Service Levies, where applicable, which further increases insurance costs. Australian authorised insurers are subject to strict prudential regulation that requires them to maintain sufficient reserves to meet expected claims costs. It would not be possible to increase the financial burden on consumers by charging the required level of additional premium on home and contents policies already costing on average $400 to $600, without increasing the already high levels of underinsurance and non-insurance in the community. Insurance Council of Australia Page 18

19 ICA estimates that as many as 70% of households in Australia are underinsured by between 70 and 90% and as many as 25% of household s have no home or contents insurance. 11 ICA recommends that the proposed joint industry-government insurance solution focus primarily on those homes that are at the highest risk of flooding and where affordability of insurance cover is most significant (within a 1 in 100 ARI or 1% likelihood of flood). ICA recommends that national standards for mitigation and land use also be built into the solution and that such standards include effective incentives and controls. Standard Definition b) Work with the new national emergency management machinery proposed in Recommendations 51 and 52 to develop a single national definition of natural hazards, including water damage, to be offered by all insurers ICA Response In an insurance context, definitions of natural hazards are most significant when there are exclusions from coverage and where there is potential overlap with other natural hazard events. Flood exclusions are the prime example. While specific wordings may vary between insurers and even within corporate groups, the flood exclusion in most home and contents insurance policies is generally defined as: The inundation of normally dry land by: water that has escaped or been released from the normal confines of any natural lake reservoir, dam, river, creek, stormwater channel, canal or any other watercourse, wether or not altered or modified; or water that has already overflowed, escaped or been released, is unable to enter any natural lake reservoir, dam, river, creek, stormwater channel, canal or any other watercourse whether or not altered or modified. The definition becomes a significant issue for the industry at the time of an event when disputes arise as to what caused the water damage. That is to say, whether the damage was caused by storm water or floodwater, or both. Hydrologists are brought in to assess the source of water damage and in many cases what proportion of the damage might be caused by which event. This same situation could occur between riverine floodwaters and tidal waters, except that most insurance policies also exclude tidal water. Insurers are eager to avoid conflicts with policyholders and, as such, have been working towards a definition of flood that would eliminate any possible disputes as to the cause of water damage (storm rainwater, flood, tidal waters, etc). In establishing the definition, it is critical that insurers have sufficient confidence in the availability of risk data to be able to assess and effectively price the risk. As such, it may be necessary to have 11 ICA, Report On Non-Insurance / Under-Insurance In The Home And Small Business Portfolio, October 2002 available at Insurance Council of Australia Page 19