What are the construction insurance implications of two NSW flood inquiries?

What are the construction insurance implications of two NSW flood inquiries? | Insurance Business Australia

What are the construction insurance implications of two NSW flood inquiries?

This week, the NSW government released the results of a parliamentary inquiry into the February and March floods, a disaster that caused a record $5 billion worth of insurance claims. The damning report included a recommendation the state government consider investing in supporting relocations, land swaps and providing compensation for landowners who wish to relocate from severely flood-impacted areas.

A second, much anticipated report into the floods is yet to be released and could have more significant direct implications for the insurance industry. This independent investigation will include recommendations about changing land use planning rules.

“In Sydney, in particular, over the past 20 or 30 years we’ve seen construction in areas that would previously have been deemed flood prone,” said Jonathan Frost (pictured above), director of Bellrock Broking in Sydney. The brokerage has clients across financial and professional services, retail, manufacturing and construction. With 20 years’ experience, Frost is the firm’s construction and development insurance expert.

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“I think that as development expands throughout Sydney and elsewhere insurers are becoming much more aware of flood zones and flood exposures and they’re looking to apply the deductibles or limitations,” he said.

Frost suggested that flood exclusions could become more common.

“We haven’t seen flood deductibles in the construction market for some time,” he said. “I think that there could be a point in time when we do start seeing things like flood being excluded for construction policies where it’s deemed to be a significant exposure, either because it’s in a flood zone, or because it’s in a previously declared flood zone that insurers are still uncertain about.”

Insurance Business asked Frost if, given the flood risks, the construction industry is resigned to the likelihood of reasonably significant changes concerning where buildings are permitted or if some stakeholders will strongly oppose changes to planning and development rules?

“I think there’s no doubt that developers particularly want to have as dense developments as they can to improve their profit margins,” said Frost. “I don’t think that flood [insurance coverage] will become completely unavailable.”

He suggested that insurance market realities and consequential difficulties in finding coverage could be factors that prevent developments in flood prone areas.

“I think that there will be resistance from that from the [insurance] market and I can’t imagine that we’d hit a situation where it will be completely unavailable to insure against flood,” he said.

However, he said even in areas at risk of flood, if regulators and local councils regard the area as suitable for construction, insurers are essentially obliged to provide insurance coverage.

“I don’t think that it should ever be the position of an insurer to have to deny cover to something that’s been approved by a regulator for construction,” he said.

Frost also said that in any debate over the policy governing flood risks and development rules insurers don’t want to become the default regulator.

“I think the insurers are very careful in terms of not wanting to become the regulators,” he said. “It’s too often the case that insurers do become the regulators by default because the regulators aren’t providing solutions or aren’t giving enough guidance.”

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The latest figures from the Insurance Council of Australia (ICA) show that insured losses for the floods across both NSW and Queensland have reached a record-breaking $5.1 billion.

ICA data shows that more than $2 billon in claims has been paid to impacted insurance customers.

The floods are now the second costliest extreme weather event in Australia’s history, behind 1999’s Sydney hailstorm, which caused insured losses of $5.57 billion (based on 2017 values).

The NSW flood investigation by independent experts was handed to the government more than a week ago but is yet to be publicly released. According to the terms of reference it will include recommendations about changing land use planning, management and building standards in flood prone locations.

The NSW parliamentary inquiry into the floods released this week found that the agencies in charge of preparing for and responding to the disaster “failed at their primary purpose” and failed affected communities.

“The committee found that these two organizations [State Emergency Service and Resilience NSW] failed to provide leadership and effective coordination in the community’s greatest time of need,” said Labor MP Walt Secord, who chaired the committee.

The report also recommended the government consider restructuring the NSW State Emergency Service (SES), including increasing salaried staff and resources, and abolishing Resilience NSW. The committee also recommended appointing a senior police officer “with combat experience to lead recovery efforts following natural disasters.”