Insurance industry needs to work harder to ensure flood cover for all

The insurance industry's outright rejection of a proposal to improve access to natural disaster insurance in the wake of this year's floods is disappointing for Australian consumers.

Reading the submissions from the Insurance Council and large insurers to the Natural Disaster Insurance Review, one could be forgiven for thinking this rejection is based more on ideology than a desire to ensure effective community protection.

Phrases such as "simplistic government intervention", "moral hazard" and "a market based solution" pepper the submissions, evidencing an unwillingness to engage with the detail of proposed solutions. One of the few redeeming features of the submissions is that at least the phrase "market based solution" suggests the industry admits there is a problem.

The insurance industry argue that the problem is not one of insurance, but the fact that floods cause individual and community damage. As evidenced by the breaking of the Wivenhoe dam, floods do cause untold harm.

To reduce the risk of such harm, the insurance industry does make good points about the need for more effort to remove or reduce flood threats to the community through mitigation activities. No-one could argue with this proposition. Equally unarguable is the need to look at planning processes that allow development in flood prone areas. But to suggest that we can address these things and then safely rely on market-based solutions, is frankly, laughable.

This year's Queensland floods resulted in over 57 000 claims with an extremely high rate of denied claims-around 15 per cent. Claims in relation to Cyclone Yasi were greater at over 60 000, but denied claims were less than 1 per cent.

The high rate of denied claims for the floods was largely because insurance policies did not include coverage for flood risk. Or, if they did purport to flood, there were serious limitations rendering the coverage meaningless. While disputes are ongoing in relation to many of these claims, for most of those that have had claims denied, the financial impact is extreme; perhaps devastating.

A key feature of the proposed solution from the Natural Disaster Insurance Review Issues Paper is for all home and building insurance policies to automatically include coverage for flood risk.

From the consumer's perspective, this would be a good outcome. No longer would they risk being bamboozled by insurance policies with hidden or confusing exclusions. Consumers would be sure that should they purchase insurance, they would be covered for all key risks like floods. This would improve confidence among consumers and may actually increase insurance uptake.

The more difficult question is how we ensure such policies can be affordable for all. Already, particularly for tenants and lower income households, insurance is unaffordable or not seen as a priority purchase.

The Natural Disaster Insurance Review suggests a funding mechanism to provide subsidies to those for whom flood cover would otherwise be unaffordable. The review also raises questions like the level of such subsidies, who should pay for them, and how long they should be offered.

These are important questions that need the input of all in the community, including insurers, to ensure reasoned and beneficial policy outcomes.

In the wake of the floods, and other natural disasters, there is a growing agreement, even among insurers, that it is essential for everyone to have insurance; not only those who can afford to pay market prices.

In other areas of essential service provision, we're used to governments intervening in private markets to ensure goods and services are affordable and accessible. We need to move to the same realisation for insurance.

By and large, consumers do trust markets to efficiently deliver quality goods and services that benefit them. However, markets don't exist for their own sake; they should improve consumer outcomes. Otherwise they have failed and intervention is warranted.

Rather than dealing in ideology, the insurance industry needs to acknowledge that, left alone, the market has not and cannot deliver for consumers. Should a flood befall us again tomorrow, claims will be denied and consumers will suffer. Insurers should work with governments, experts and consumers to propose effective solutions to community problems.

A competitive market for private insurance is part of that solution, but it should be one that ensures all insurance policies will cover flood risk for those that may need it on a rainy day.