On 4 March 2011 the Hon Bill Shorten, MP Assistant Treasurer and Minister for Financial Services and Superannuation announced an independent review into disaster insurance in Australia following the floods in January 2011.
Recent widespread flooding and other extreme weather events have caused devastating losses which have been borne by individuals and businesses, State and local Government, community organisations, the Australian Government, private insurers and reinsurers.
The Final Report was publicly released on 14 November 2011.
To meet these requirements, the Panel is making four pivotal recommendations. They are: Pivotal Recommendation 1: Architecture That an agency sponsored by the Commonwealth 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. While this new agency would need to be established under Commonwealth legislation, to function effectively it would need to operate along the lines of a joint venture between the Commonwealth, the States and the insurance industry. Given the right level of expertise and authority, the right kind of governance structure and accountability, and a brief to apply itself exclusively to these matters, a single agency of this kind would have the wherewithal to succeed where previous efforts of cooperation, in good faith, amongst a myriad of agencies and departments of government (Commonwealth, State and local) and insurers have yielded limited results. Pivotal Recommendation 2: Availability That all home insurance, home contents and home unit insurance policies include flood cover.
While acknowledging that many insurers are working hard to extend the availability of flood cover, their initiatives alone will not meet the community need. Pivotal Recommendation 3: Affordability That a system of premium discounts be introduced in order that most purchasers of home insurance, home contents and home unit insurance policies in areas subject to flood risk be eligible for discounts against the full cost of flood insurance. The nature of flood risk, whereby flood prone land can be identified because it has a higher risk of flood than other land, can lead to high insurance premiums for flood cover in these locations with the result that flood cover, if available, will generally be seen as unaffordable. Pivotal Recommendation 4: Funding The Commonwealth Government guarantee 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 existence of such a guarantee would ensure that discounts offered for affordability purposes do not increase the premiums for householders with no flood risk. It is notable that these four pivotal recommendations represent an integrated system. A new government-sponsored agency charged with national coordination of flood risk management and with operating the system of premium discounts and the flood risk reinsurance facility, supported by a funding guarantee from the Commonwealth, would create the capacity to deliver flood insurance premium discounts, and also to influence flood risk mitigation and ensure the availability of flood insurance to all relevant policyholders. Flood insurance premium discounts are a prerequisite for homeowners to be able to afford to purchase flood cover, which in turn makes it possible to deliver on the Review Panel’s conclusion that unequivocal insurance coverage for flood is central to addressing the community need. It is important to note that, in recommending that flood cover be included in all home contents and home unit insurance policies, the Review Panel is not recommending that insurance itself be made compulsory. There need also be no increase in premiums for policyholders who have no flood risk and no cross subsidisation of insurance premiums among policyholders. By way of further explanation of the recommended new national agency, it would have two key functions, national coordination of flood risk management and operating the flood risk reinsurance facility
The Government’s Response to the Final Report is available on the Assistant Treasurer’s website.