The Queensland floods of December 2010 and January 2011 were devastating. At least 35 people died. Approximately 29,000 homes and businesses were inundated. Over 78% of Queensland was declared a disaster zone and over 2.5 million people were affected. The directly referrable financial cost has been estimated at between $5 and $6 billion. The wider economic impact has been estimated at over $30 billion.
Further still, the full impact remains to be seen, including the impact on the Australian insurance industry. Nevertheless, two significant inquiries that considered this issue, in detail, were the Queensland Floods Commission of Inquiry (Commission) (at state level) and the Natural Disaster Insurance Review (Review) (at federal level). DLA Piper had the privilege of acting for the Insurance Council of Australia and a number of insurers in the Commission.
QUEENSLAND FLOODS COMMISSION OF INQUIRY
The Commission was called upon to examine (amongst other things) the performance of private insurers in meeting their claims and responsibilities. It is required to issue its final report, which will include reference to these insurance-related matters, by 24 February 2012.
Unlike the Review, the Commission was not called on to examine issues such as the availability of flood cover, disclosure of exclusions, the definition of flood and/or the adequacy of specific policy wordings. In contrast, it focused on the processes by which insurers assessed and decided the outcome of claims, as well as the manner in which insurers handled complaints about their performance.
Although selected insurers were taxed heavily in this process, it is a testament to the insurance industry that:
- While there were in excess of 130,000 claims lodged during the flood and cyclone season, only 11 insureds gave evidence at the Commission of complaints against insurers.
- While there were hundreds of submissions made to the Commission, there were actually very few complaints regarding insurance.
- Where it could be proven by call recordings and other records, the evidence often emphasised that insurers acted with compassion and diligence, despite the very significant strains on resourcing investigations and communications during the relevant months.
Nevertheless, although the Commission's final report and recommendations have not yet been released, a detailed review of the evidence adduced before the Commission indicates that it is likely to identify areas for improvement by insurers generally. These areas include:
- The documentation to be provided to insureds on declinature
- The explanations to be provided to insureds during internal dispute processes
- The information to be provided to insureds in relation to claims processes
- That time frames be set regarding the determination of claims as a result of a natural disaster (noting that the Insurance Council of Australia has already recommended the Insurance Industry Code of Practice be changed for determinations to be made within four months, except in exceptional circumstances)
- That time frames be set regarding communications with insureds as to the progress of their claims during natural disasters, again necessitating amendments to the General Insurance Code of Practice.
Further pending recommendations in relation to flood mapping regulation and the preparation and collation of hydrology information should also assist insurers to better understand, measure and cost risks.
These recommendations and anticipated legislative and Code changes will impact on the systems and processes used by Australian general insurers in their handling of claims. Obtaining early advice and giving attention to implementing those changes will be prudent.
NATURAL DISASTER INSURANCE REVIEW
The Review examined systemic questions as to how disaster insurance should operate. Whilst the Review arose due to various extreme weather events in late 2010 and early 2011 (including storms, cyclones and flooding), its primary stimulus was the absence of flood insurance for many policyholders affected by the Queensland floods.
As anticipated, the availability and affordability of flood cover was very much at the heart of the Review's final report, which made four "pivotal recommendations" and 47 "specific" recommendations. The pivotal recommendations were:
- Architecture: That an agency sponsored by the Federal Government be created to manage the national coordination 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
- Availability: That all home insurance, home contents and home unit insurance policies include flood cover
- 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
- Funding: That the Federal 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 seek reimbursement of a portion of the shortfall from the state or territory government in whose jurisdiction the flood occurred.
The 47 specific recommendations included the following:
- Mandatory flood cover in home building and contents insurance and domestic strata insurance, but not that the purchase of insurance 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
- 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:
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- To deliver discounts to home, contents and home unit insurance policies for eligible properties
- To provide flood reinsurance capacity to the insurance market
- The establishment of a national agency sponsored by the Commonwealth to undertake national coordination 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 1984 (Cth) to require derogation from standard cover by means other than by simply providing a copy of the insurance policy or Product Disclosure Statement
- 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.
In responding to the Review's final report, the Federal Government accepted (amongst other things) the Review's:
- Recommendation for a standard definition of flood; namely, the covering of normally dry land by water that has escaped or been released from the normal confines of (a) any lake, or any river, creek or other natural watercourse, whether or not altered or modified; or (b) any reservoir, canal, or dam
- Endorsement of the Federal Government's proposal for the implementation of a requirement for insurers to provide their customers with a key facts sheet for all home and home contents policies, which clearly sets out, on a single page (as a complement to the existing Product Disclosure Statement), all key information about the features of the policy.
This saw the introduction of the Insurance Contracts Amendment Bill 2011 (Cth), which is yet to be the subject of parliamentary debate.
If they are implemented, the provisions of the Bill and the Review's recommendations will have a significant impact on the terms and cost of flood cover in the Australian retail insurance market. The Federal Government is therefore continuing to consult with relevant stakeholders, including with respect to those recommendations concerning premium calculation and reinsurance.
HOUSE OF REPRESENTATIVES STANDING COMMITTEE
In addition to the above inquiries, the House of Representatives Standing Committee on Social Policy and Legal Affairs (Committee) is also examining the insurance industry's response to the Queensland flood events, including the claims processing arrangements and the conduct of external dispute resolution processes.
However, unlike the Review or the Commission, the Committee is focused on the insurance industry's response to the numerous recent extreme weather events that have occurred around Australia (even as far back as five years ago), whether that be flooding, bushfires, storms, cyclones or otherwise. The Committee's report is expected to be available once it has been tabled in Federal Parliament, which should occur in early 2012.
THE YEAR AHEAD
The availability of better flood mapping and other hydrological information will continue to allow more insurers to offer flood cover, although premiums for risks with higher exposure to natural disasters, such as floods, will increase.
Although the examination and assessment of the insurance industry's response to the Queensland flood events is by no means complete, insurance industry participants will need to give careful and urgent attention to additional obligations and responsibilities that will arise as a result of these inquiries and consequential changes.
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