A cash settlement priced from an insurer's preferred builder is priced at a rate the policyholder cannot obtain. That is the mechanism at the centre of the corporate regulator's home insurance findings and it is the one the industry's response does not address.
In Beyond the payout: ASIC warns home insurers to reduce cash settlement risks, the Australian Securities and Investments Commission (ASIC) found that in 52% of Cyclone Jasper claims, insurers relied on a single quote to make their cash offer - and that 73% of those single-quote claims used the insurer's own preferred supplier. ASIC notes it is generally accepted practice for preferred suppliers to discount pricing for insurers in exchange for repeat business. The consequence is arithmetic: if the consumer cannot engage a supplier at that rate, the settlement will not cover the repairs.
Insurance Business Australia approached three of the five insurers named in the review, along with the Insurance Council of Australia (ICA). QBE and Allianz both referred Insurance Business to the ICA.
ASIC's own case study demonstrates the gap better than any figure in the review.
An insurer offered a cash settlement based on a preferred builder's quote. The customer asked that same builder whether they would carry out the repairs for the amount offered. The builder said they could not - they had undercut their costs by 40% for the insurer.
The customer lodged a complaint. The insurer then increased the offer by 16.5%, plus a further 20% for contingencies. ASIC's assessment was that consumers should not have to lodge a complaint to get a fair outcome.
Read the numbers in sequence and the original offer was short by more than a third. Nothing about the damage changed between the first offer and the last. What changed was that the customer pushed.
The industry has a mechanism for this. A contingency, or loading, is a percentage added to a quote to compensate for the discount the insurer received and for the risk the consumer takes on in managing the work themselves. Applied consistently, it closes the gap between the insurer's price and the client's price.
ASIC found no insurer in the review had a consistent policy of applying contingencies to preferred-supplier quotes. One applied 10% to a single claim and not to others it examined. One applied 20%, but only after a complaint. In two cases where an insurer obtained more than one quote, it settled on the lowest. Only one insurer reported using a cost-plus pricing model to ensure a preferred supplier's quote reflects market rates for labour and materials.
So the tool is available, understood, and used inconsistently enough that whether a client receives it may depend on whether they object.
The ICA's response went to information rather than amount.
"Insurers are committed to fair customer outcomes and recognise that customers must have clear information on cash settlements," an ICA spokesperson said.
The insurer peak body also argued the industry has already lifted its game on cash settlements
"There has been a significant industry uplift since Tropical Cyclone Jasper, with a focus on making sure cash settlements are clearly explained and understood," the spokesperson said. "Through the General Insurance Industry Action Plan, the industry has updated guidance and customer information on cash settlements to explain how they work, including important things for customers to keep in mind."
The ICA said cash settlements give customers speed, choice and control over their own repairs after a disaster, including the ability to prioritise urgent fixes and decide how funds are spent. It said the review of the General Insurance Code of Practice will set stronger, contractually enforceable obligations on cash settlements and on support for customers experiencing vulnerability, and that insurers are committed to working with ASIC to deliver fair outcomes.
Clearer explanation is a real improvement. But ASIC's finding is not that customers misunderstood the offer. It is that the offer may not have been enough. A well-explained settlement built on a trade discount the client cannot access still leaves them paying the difference.
Whether the redrafted Code closes that gap depends on whether its cash settlement obligations reach adequacy or stop at disclosure. Consultation closed in July and the latest draft is expected to reach ASIC later this year.
Until then, the ASIC review gives brokers a specific line of enquiry rather than a general concern.
Ask how many quotes the offer rests on. Ask whether the quoting builder is the insurer's preferred supplier. Ask whether a contingency has been applied, and at what percentage. If the answer is one quote, from a preferred supplier, with no loading, the offer is priced at a rate the client has no way of obtaining.
ASIC's stated expectation is that insurers will be better placed to demonstrate compliance if cash settlement offers are based on prices the consumer can realistically obtain in the open market. That is not yet a contractual obligation. It is, however, on the record.
