Insurance products need to evolve to cover all Australians

Hands up who remembers the public liability insurance "crisis" of the early 2000s?  You should - it was the last time this country saw significant reforms made to its insurance laws and, whether you know it or not, it has affected you.  The result of those reforms was a system much more heavily weighted in favour of insurers and against you as a potential consumer or third party beneficiary of insurance cover.

Since then, insurance policy has flown decidedly under the radar, with little appetite to tackle unfair outcomes for consumers and major reforms made to the rest of the economy giving insurers a free pass - think moves to ban commission payments and conflicts of interest for financial advisers, the new national unfair contract terms laws or the new consumer guarantees regime - none of which apply to insurance.

Now, if anything positive can be drawn from the devastation of January’s floods, it’s that the public and the government are again starting to ask more questions about our insurance law and policy settings.  This time, however, the debate is much more focused on the needs of the community as a whole.

Under our current system, by the insurance industry’s own estimation, half of those hit by the Brisbane flood waters who were insured are still unlikely to be covered, because the damage they've suffered was caused by riverine flooding, and that cause of damage is excluded from their policies.

Those families are going to be left relying on the generosity of friends, family, government, welfare organisations and public donations to rebuild their lives – largely because many of them would have failed to comprehend that river flooding was excluded from their policy or the importance of that exclusion.  So too will many families who simply didn't have any home building or contents insurance cover at all, with insurance industry research indicating that it tends to be lower income households in this position.  Surely we can do better than this.

The Federal Minister has already held meetings with the industry to push for changes on some of the most obvious problems.  These include fixing the confusing and varying definitions of flood in policy exclusions with one mandatory common definition, and ensuring that consumers get a simple one page fact sheet before the choose their insurance policy, so policy holders know what they will and won't be covered for.

These positive reforms, like many in the insurance field, have faced unreasonable and dogged  opposition from the industry at every step until recent events.  Finally we are seeing some welcome steps forward, but a mandatory flood definition and better consumer information won't actually fix most of Australia's non-insurance and under-insurance problems.  We still have a long way to go to ensure Australians get a fair go from their insurers.

The flood insurance definition issue has garnered extensive attention in the media, but even for those who have policies that cover flood damage, relief may be short lived if they (like most Australian policy holders) find they have a sum insured policy rather than replacement value cover.

One of the lessons we have learned from previous disasters is that Australia has a chronic problem with under-insurance.  It’s notoriously difficult for homeowners to estimate the real cost of rebuilding their home in any circumstance, but it becomes virtually impossible in the event of a natural disaster when the cost of rebuilding rises exponentially.  We've seen rebuilding costs escalate wildly after Cyclone Tracy, Cyclone Larry, the Newcastle earthquake and the Canberra and Black Saturday bushfires.

However, most Australian home insurance policies still require the consumer to assess how much cover they need and nominate the maximum sum they will be insured for - this is a sum insured policy.  By contrast, under a total replacement policy, the insurer guarantees to cover the cost of replacing your home or contents, meaning the insurer must ask more questions to assess the risk properly but will then calculate how much cover they need to insure and price you for.

It gets worse.  The insurance industry has tended to blame consumers for this problem, saying they need to make better assessments of how much cover they need.   But in 2005, an ASIC report on the Canberra bushfires found that home owners relied on their insurer to determine the cost of replacing their home and, thus, what amount to insure for.  As a result, most homeowners ended up under-insured.  It seems that this operates in practice a bit like an "excess" payment,  a concept  consumers are more familiar with, because it shifts more of the risk onto consumers.

Following the Black Saturday bushfires, the issue of under-insurance did not garner the attention it deserved, mainly because those affected often received bushfire appeal fund payments that helped cover the shortfall in their cover and let insurers off the hook.  It’s ironic that the insurance industry has criticised post-disaster assistance payments on the grounds that it encourages people to avoid taking out their own insurance cover.  Rather, it has been taxpayers and community donations that have subsidised insurer profits when policy holders have not been fully covered under their policies.