Chapter 20: Insurance
20.1 Having adequate insurance is an important way for households and businesses to manage financial risks from natural hazards. It is beneficial for consumers, the insurance sector and governments that insurance markets are operating effectively.
20.2 Insurance is important because individuals cannot rely on public and charitable entities to restore their positions following a natural disaster. Government funding does not take the place of insurance, and nor should this be expected. Further, governments should not disadvantage or disincentivise those who have insurance, for example through recovery targeted to the uninsured, as to do so may encourage underinsurance.
20.3 Several other prior and concurrent inquiries have identified impediments reducing the effectiveness of insurance to help manage risk from natural hazards. These include issues which can reduce insurance affordability, limit consumer understanding, and reduce insurance coverage. For insurance to function effectively as risk rises, the outcomes of these inquiries should be addressed.
20.4 Confusion over debris clean-up arrangements was a particular concern for the 2019‑2020 bushfire season. We recommend that governments outline in advance the circumstances and timeframes over which they will or will not provide assistance for debris clean-up, to avoid adverse impacts on consumers and insurance markets and provide national clarity on recovery support.
20.5 As insurance prices risk, lowering risk through mitigation actions can benefit both consumers and the insurance sector. Recognition of mitigation can reduce insurance premiums and in turn provide financial incentives for mitigation. We consider in Chapter 19: Land-use planning and building regulation how insurers and consumers can better recognise which mitigation options will reduce risk and costs.
The role of insurance in managing natural disasters
20.6 General insurance refers to insurance other than life insurance, and includes several types of insurance. Most relevantly, two types of general insurance play an important role in the management of the risks associated with natural hazards:
- home, contents and vehicle insurance, and
- business insurance, including property and business interruption insurance.
20.7 General insurance plays several important roles in managing natural disaster risk:
- it allows people to manage a risk financially, including the risks posed by natural hazards, under agreed circumstances
- it can communicate risk via the cost of premiums and thereby influence behaviour, such as where people decide to live or how to build or renovate, and
- it can help households and businesses recover after a disaster. 
20.8 The success of these roles depends on households and businesses maintaining adequate insurance coverage. As discussed in Chapter 21: Coordinating relief and recovery, while charity and government assistance can be of great support to individuals impacted by disasters, it should not be relied on by those individuals as a substitute for insurance.
20.9 The Reserve Bank of Australia (RBA) reported that ‘inflation-adjusted insurance claims for natural disasters in the current decade have been more than double those in the previous decade’.  Insurance claims for cyclones Debbie and Yasi, in 2017 and 2011 respectively, amounted to over $1.5 billion each, and the claims in relation to widespread flooding in Queensland in 2010-11 amounted to around $2.4 billion.  More recently, as at 27 August 2020, around 38,500 claims (including building, contents and commercial insurance claims) had been lodged as a result of the 2019‑2020 bushfires, totalling an estimated $2.33 billion. 
20.10 The RBA expects that the insurance industry will be increasingly exposed to natural hazard risk as the climate changes. The RBA expects that this impact will grow over time, and may create barriers to efficiently pricing insurance, which would adversely affect the insurance industry, consumers, businesses and governments.  The 2020 Severe Weather in a Changing Climate report by Insurance Australia Group (IAG) and the National Center for Atmospheric Research (NCAR) noted that climate change is expected to ‘substantially increase the frequency and intensity of weather and climate extremes’. 
20.11 The general insurance market is complicated. Any government intervention in the market can have positive and negative consequences that need to be carefully considered before action is taken.  For example, changes to the regulatory architecture to mandate a more comprehensive level of basic coverage could lead to increases in insurance premiums, and, in turn, this decreased affordability could have the unintended effect of pushing more people to cease their insurance or to underinsure.
20.12 We are also conscious that insurance in respect of natural hazard risks is only one aspect of the general insurance market, and each of the issues identified in this chapter affects not only natural hazard insurance but also insurance more broadly. A number of prior and concurrent inquiries have considered insurance in greater detail and in many cases more broadly, across the full scope of the general insurance market (see Box 20.1).
20.13 Although our Letters Patent do not explicitly mention insurance, it is an important aspect of natural hazard risk management. We have had regard to prior and concurrent inquiries including on insurance, while seeking to avoid duplication. As those inquiries also consider issues which impact upon the effectiveness and efficiency of insurance in preparing for, mitigating against and recovering from natural disasters, their outcomes merit careful consideration.
20.14 The National Disaster Risk Reduction Framework lists improving the accessibility, variety and uptake of insurance as a key goal for risk reduction.  Our observations and recommendations are focused on insurance as a risk management tool in relation to natural hazard risks. We have focused on four main issues affecting the ability of insurance markets to assist in the management of natural hazard risks efficiently and effectively. These are:
- increasing premiums and other factors, which are potentially leading to issues with under- and non-insurance, decreasing the overall effectiveness of insurance as a tool to manage natural hazard risks 
- issues in relation to data and information that are potentially impeding the ability of insurers to price risk through premiums accurately
- the complexity of insurance, which is potentially impeding the ability of households and businesses to make informed decisions, and
- taxes on insurance, which can cause market distortions and potentially reduce the extent of insurance coverage.
Maintaining adequate insurance coverage
20.15 For insurance to help people manage natural hazard risk most effectively, households and businesses need to maintain adequate insurance coverage.
20.16 In part due to increasing costs driven by rising risk and tax distortions, absence of (or insufficient) insurance has been raised as a growing concern by other inquiries, consumer groups, and the insurance industry.  At present around 95 per cent of homes are insured for loss or damage,  but we have not obtained rigorous estimates on underinsurance.
20.17 The National Insurance Project Final Report to the Australia-New Zealand Emergency Management Committee in 2020 estimated that gaps in coverage are significant for contents insurance (among renters) and business interruption cover.  It noted that up to 15 per cent of businesses do not have insurance for interruption to business caused by natural hazards. 
Box 20.1 Relevant insurance inquiries
The Productivity Commission inquiry into Natural Disaster Funding Arrangements. In 2015, the Productivity Commission released its report for its inquiry into natural disaster funding.  The inquiry examined the role of insurance, information about insurance, affordability, and understanding of insurance. It addressed the impact of insurance taxes and disclosure of risk information among other matters.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. In 2019, the Royal Commission delivered its report to Government. A number of recommendations in this report concerned insurance and generally related to improving consumer protections, including on unfair contract terms, external dispute resolution, and claims handling.  The Australian Government accepted the report’s recommendations which are currently being implemented and given effect by the Australian government and industry. 
The Australian Competition and Consumer Commission (ACCC) Northern Australia Insurance Inquiry. This inquiry is considering insurance in Northern Australia – the inquiry noted that its finding and recommendations will in many cases be relevant to all of Australia  – including insurance pricing and affordability, consumer understanding of insurance products and of natural hazard risk, and distortions to the effectiveness of insurance markets.  It commenced in 2017 and has released two interim reports.  The ACCC is due to deliver its final report by 30 November 2020.
The Treasury Disclosure In General Insurance Review is currently investigating a number of insurance issues in response to the 2017 Senate Economics Reference Committee report on issues in general insurance in Australia, which includes consumer understanding of issues such as standard definitions and the standard cover regime.  We have been told that this work has been delayed due to competing priorities such as the implementation of the recommendations of the Financial Services Royal Commission. 
I don’t know how people got through without insurance coverage because it would have been tragic and awful. 
20.18 The fewer people who are covered by insurance, the less effective it is at managing risk, because the benefits of risk-pooling are reduced. Additionally, when households that are uninsured or underinsured are affected by a natural disaster they can face costs that they cannot meet, and, where this happens, costs may also accrue to governments, such as through increased claims for social security. 
20.19 Consumer groups have expressed concern in relation to underinsurance for sum‑insured cover.  In some cases, sum-insured cover has been too low – either due to a choice on the part of consumers to underinsure, or an under-estimation of the costs of rebuilding and additional components such as debris clean-up that will, in turn, be taken from the sum-insured amount. In some cases, this has led to insufficient funds to rebuild a house, though the scale and the extent of sum‑insured issues are unclear. 
20.20 Consumer groups have suggested that the creation of systems (or improvements to existing sum-insured calculators) to provide consumers with accurate and up-to-date estimates of the cost of rebuilding in a given area should be considered. 
Data, information and insurance pricing
20.21 Insurance puts a price on risk. Reflecting this, insurance costs rise as risks rises. Increasing natural hazard risk is likely to put upwards pressure on the cost of insurance premiums, potentially exacerbating affordability issues.  Affordability is an important concern because increases in the cost of insurance can lead to people choosing to decrease or abandon their insurance coverage. 
20.22 To price risk accurately, insurers need good information to gauge the risk profile of what is being insured.  Where data are less accurate, insurance pricing will be less accurate – it may over- or under-price risk. The price of insurance can also be used to signal risk to consumers,  so it is important that this signal is accurate.
20.23 We refer to three limitations to data and information that are available to insurers:
- gaps in data and information about existing natural hazards, exposure and vulnerability
- capabilities to create projections of future risk, such as where climate change is resulting in changes to the frequency and intensity of hazards and increases to exposure, which is increasing the difficulty of assessing risk, and
- lack of ability for insurers to recognise where risk mitigation has been undertaken, and for consumers to know which mitigation actions will be recognised.
20.24 To the first two points, insurers have a great deal of data on natural hazard risk and impacts, but the quality and consistency of data varies across Australia. Data inconsistency, which the insurance industry has raised as an issue, is in part attributable to the range of data sources of varying consistency and quality, including data produced by state and local governments.  The IAG NCAR report and other submissions from industry also noted the need for more data on the impacts of climate change on natural disasters. 
20.25 We consider data consistency and improvements to climate and risk data and information in Chapter 4: Supporting better decisions.
20.26 To the third point, as insurance puts a price on risk, reducing risk by undertaking mitigation and resilience activities should help lower insurance costs and premiums.  We have seen that insurance is responsive to large-scale risk mitigation activities, such as the construction of a flood levee, but individual-level mitigation activities are often not recognised by insurers.  The insurance industry has called for greater investment in mitigation and this should be reflected in the pricing of premiums. 
20.27 We explore the issue of recognising and incentivising mitigation in greater detail and provide a recommendation to address this issue in Chapter 19: Land-use planning and building regulation.
20.28 We would expect that improvements to data will be reflected in premiums, including reduced premiums where governments, homeowners and business take action to mitigate risk.
Consumer understanding of insurance
20.29 Insurance products are complex, and many consumers have difficulty understanding both their risk profile and the range of inclusions and exclusions in policies.  Insurers and regulators should continue to work towards improving consumer understanding of insurance for natural hazards. Poor understanding of insurance can lead to poor outcomes and reduce the effectiveness of insurance as a risk management tool.
20.30 A Monash University study found evidence that most people have difficulty understanding insurance products.  Submissions and other inquiries suggest improvements to standard insurance definitions and the standard cover regime could improve consumer understanding. 
20.31 Standard definitions provide consistent scope in relation to a given insurable event, but, so far, only the definition of ‘flood’ has been standardised.  During our inquiry, we received evidence suggesting benefits in standardising the definition of ‘fire’ and other natural hazards. 
20.32 The standard cover regime provides a set level of coverage for given insurance products. However, we heard that standard cover can be altered to become non‑standard (such that it may exclude ‘standard’ events), and that these alterations and their consequences are often unclear to consumers. 
20.33 Clear and reliable information on both risk and insurance products should also improve consumers’ ability to make informed decisions about how to use insurance.  This could be done via mechanisms such as rating systems that could be communicated to consumers with insurance notices and other media.  The value of communicating clear information on risk to people is discussed further in Chapter 19: Land-use planning and building regulation.
20.34 Services that assist people with information during a time of financial hardship provide valuable support during a crisis. Difficulties with making an insurance claim, or claims handling as it is called, can place a high emotional burden on people already dealing with the aftermath of a natural disaster. 
20.35 However, some unregulated businesses which offer to ‘assist’ people in the claims handling process have been reported to be ‘unscrupulous’ and charge high prices for very simple services that may be available for free.  The Australian Financial Complaints Authority raised issues with unregulated claims management as a key concern, saying: 
We find these businesses provide little help but charge fees of up to 30% of a cash settlement. Assistance with insurance claims is available free for consumers and AFCA’s complaint resolution services are designed to be used by consumers without representation. 
20.36 The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recommended that claims management service businesses be regulated as financial services, affording protections to those consumers who use them in the future.  This reform is being progressed by Treasury, subject to a six‑month delay due to the COVID-19 pandemic. 
20.37 However, overall, we heard that most insurance claims arising out of the 2019‑2020 bushfire season were handled by insurers proactively and in a timely manner, and that the number of complaints arising out of those claims was relatively small.  Notwithstanding the worthy efforts of insurers, we also heard evidence that there was an increase in the demand for free legal advice in relation to insurance claims, and that legal service providers continue to receive requests for such assistance. 
20.38 The review and update of mechanisms which can improve consumer understanding and use of insurance – including standard definitions, the standard cover regime, and regulation for claims management services – should be prioritised.
Insurance taxes and insurance pricing
20.39 Previous inquiries have found that the cost of insurance is also being increased by the cost of insurance taxes, especially those imposed by most state governments. 
20.40 This can detract from the ability of insurance to signal risk accurately,  and contribute to affordability issues raised above. Insurance taxes exist in three forms:
- levies for emergency services – currently the NSW Emergency Services Levy and the Tasmanian Insurance Fire Levy – Victoria also had a similar levy on insurance until 2013, when they moved to a property tax
- stamp duty on insurance – this duty is imposed across Australia at a rate of around 10% in each state, with the exception of the ACT which abolished insurance stamp duties in 2016,  and
- the Goods and Services Tax (GST).
20.41 The Insurance Council of Australia (ICA) estimates that, in NSW, insurance taxes can add more than 50 per cent to the cost of an insurance premium for a household, while in the ACT only 10 per cent is added by taxes, by the GST.  (See Table 10 for figures across all states and territories.)
Table 10: Impact of insurance taxes 
20.42 Consumer groups and insurers have recommended that taxes on insurance – namely emergency services levies and stamp duties – be abolished to lower insurance costs.  This has also been recommended by previous inquires including:
- NSW Federal Financial Relations Review draft report 2020: ‘All specific taxes on insurance products, including the Emergency Services Levy in NSW, should be abolished and replaced by more efficient and broad tax bases, to improve the affordability and uptake of insurance’ 
- ACCC’s Northern Australia Insurance Inquiry interim reports 2018 and 2019: ‘Abolish stamp duty on home, contents and strata insurance products’ 
- Productivity Commission Natural Disaster Funding Inquiry report 2015: ‘State and territory taxes and levies on general insurance should be phased out and replaced with less distortionary taxes’ 
- Australia’s Future Tax System 2010: ‘Over time, a broad-based cash flow tax — applied on a destination basis — could be used to finance the abolition of other taxes, including payroll tax and inefficient State consumption taxes, such as insurance taxes’,  and
- Victorian Bushfires Royal Commission report 2010: ‘The State replace the Fire Services Levy with a property-based levy and introduce concessions for low‑income earners’. 
20.43 Due to the costs added to insurance premiums by state and territory insurance taxes, and the effect that this can have on affordability and coverage, states and territories should consider the relevant findings and recommendations of previous inquiries.
20.44 The insurance of public assets, such as arrangements administered by state-owned insurers, are covered in Chapter 22: Delivery of recovery services and financial assistance.
Previous and ongoing insurance inquiries
20.45 Governments should give careful consideration to the findings and recommendations of the prior and concurrent inquiries into insurance, with respect to the use and accessibility of insurance as a risk management tool for natural disasters. Such consideration and the resultant responses should occur in a timely manner.
20.46 All governments, with the exception of NSW, which noted a need for further time for internal consultation, expressed support or support in principle for the proposition that they consider the findings of these reviews as they relate to insurance issues. 
Guidance on debris clean-up
20.47 One of the specific insurance issues highlighted during our inquiry related to problems experienced with debris clean-up following a disaster. Many parties, including local councils and insurers, expressed frustration over debris removal and clean-up services after the 2019‑2020 bushfires. This was partly caused by sum‑insured cover issues and the cost of debris clean-up (especially for contaminated debris like asbestos which can increase clean-up costs significantly) and partly by confusion as to responsibilities between insurers and the states that offered clean-up assistance.  In some cases, this resulted in delays to clean-up, payments, or rebuilding.  Suncorp noted that:
Despite ongoing discussions between the insurance industry and state governments, by mid-February 2020 we were still unable to provide our customers with certainty around how the government schemes would work, when RoD [Removal of Debris] works would take place at their properties, or how the financial arrangements for the scheme would affect them. 
20.48 Creating guidance on debris clean-up has broad support from most governments, the insurance industry, and consumer groups. 
20.49 The ICA has suggested that government debris clean-up guidance be developed in consultation with the insurance industry, to ensure that this guidance is workable and fair for both insured and uninsured residents, and does not create incentives that lower insurance coverage.  The Consumer Action Law Centre expressed the view that any savings for insurers from government debris clean-up programs should be passed onto the policyholders impacted by the disaster. 
20.50 If governments choose to provide assistance in debris clean-up or in other matters, they should be careful not to create incentives that result in inequitable outcomes, or result in individuals and households reducing insurance cover and thereby shifting the costs of risk to governments.
Recommendation 20.1 Debris clean-up arrangements
Governments should create and publish standing policy guidance on whether they will or will not assist to clean-up debris, including contaminated debris, resulting from natural hazards.
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