The availability of flood cover for policy holders affected by the Queensland floods was the primary stimulus for the Natural Disaster Insurance Review ("the Review") announced by the Commonwealth Government in March 2011. As such, the issues of availability and affordability of flood cover are very much at the heart of the Review's report, which was published yesterday. One recommendation is that all home insurance, home contents and home unit insurance policies are to include flood cover. The Commonwealth Government has immediately responded with a proposed standard definition of flood:
"Flood means the covering of normally dry land by water that has escaped or been released from the normal confines of:
- any lake, or any river, creek or other natural watercourse, whether or not altered or modified; or
- any reservoir, canal, or dam."
Regulations to introduce that definition will be introduced by the end of this year.
The Review was chaired by John Trowbridge, with John Berrill and Jim Minto as members, and handed down its report on 14 November 2011. The Report can be found here.
In summary, the Review has made four "pivitol" recommendations, out of which fall 47 specific recommendations. If implemented, these recommendations will impact significantly on the terms and cost of flood (and other disaster event) cover in the Australian "retail" insurance market. However, even a partial implementation of the recommendations will require changes to the terms, systems and processes of the products of most retail insurers.
The "pivitol" recommendations are:
Pivotal Recommendation 1: Architecture
That an agency sponsored by the Commonwealth Government be created to manage the national co-ordination of flood risk management and to operate a system of premium discounts and a flood risk reinsurance facility, supported by a funding guarantee from the Commonwealth.
Pivotal Recommendation 2: Availability
That all home insurance, home contents and home unit insurance policies include flood cover.
Pivotal Recommendation 3: Affordability
That a system of premium discounts be introduced so that most purchasers of home insurance, home contents and home unit insurance policies in areas subject to flood risk are eligible for discounts against the full cost of flood insurance.
Pivotal Recommendation 4: Funding
That the Commonwealth Government guarantees the payment of claims by ensuring that, whenever a funding shortfall occurs in the reinsurance facility through claims exceeding the funds held in the facility, the Commonwealth would meet the shortfall and the Commonwealth would seek reimbursement of a portion of the shortfall from the state or territory government in whose jurisdiction the flood occurred.
The 47 specific recommendations include the following:
- Mandatory flood cover in home building and contents insurance and domestic strata insurance, but not that the purchase of insurance should be mandatory.
- The introduction of a flood insurance premium design and discount regime that will "match" flood premium with flood risk and provide phased out discounts on flood premium for "eligible" homes.
- Flood insurance for small businesses on an "opt out" basis.
- That by the end of 2014, all home building insurance policies must have a sum insured that is set at full replacement cover in the event of a total loss.
- The establishment of a "government guaranteed" flood risk reinsurance facility, or reinsurance pool, which would have two primary functions:
- to deliver discounts to home, contents and home unit insurance policies for "eligible" properties; and
- to provide flood reinsurance capacity to the insurance market.
- The establishment of a national agency sponsored by the Commonwealth to undertake national co-ordination of flood risk management and to operate the system of premium discounts and the flood risk reinsurance facility.
- That access to insurance be enhanced through the development of alternative payment options, in particular by payments through Centrelink and state, territory and/or local governments and community housing organisations.
- The introduction of a standard definition of "flood" and amendments to the Insurance Contracts Act to require that derogation from standard cover by other means than by simply providing a copy of the insurance policy or product disclosure statement. The Review has also endorsed the Commonwealth Government's "key facts statement" proposals.
- That the unfair contract terms laws be applied to general insurance.
- Changes to the General Insurance Code of Practice, including in relation to the time required to decide claims arising from natural disasters, internal dispute resolutions systems and processes and the appointment to the General Insurance Code Compliance Committee.
The Government has also announced that it will pursue consultation on the proposal that all insurers must offer flood cover as part of home building and home contents insurance policies, while giving consumers the opportunity to "opt-out" of that cover.
The "key facts statement" proposal will be implemented with further consultation to take place early next year.
The Commonwealth Government noted that some of the recommended changes to the Code of Practice have already been agreed and that discussions with the insurance industry were underway regarding other recommended changes to the Code.
The Government will give detailed consideration of the other recommendations of the panel, such as those relating to premium calculation and reinsurance, including by engaging in consultation with the relevant stakeholders. This will include an issues paper to be released in 2012 following completion of the consultation process on the mandatory opt-out proposal.
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