In 2011, Australia was struck with a number of catastrophic incidents, including wide-spread overland flooding in south-east Queensland. Dozens of lives were lost and damage totalled $1.5 billion in insured losses. However, many policyholders discovered they did not have sufficient flood coverage, resulting in a wave of negativity for the insurance industry and calls for improved regulation. Karl Sullivan, General Manager for the Policy, Risk and Disaster Planning at Insurance Council of Australia, shares how Australian insurance has since changed – and what Canada could learn from their efforts.
The key to managing flood risk, from both an insurance and government perspective, is data. Over the past decade the Insurance Council of Australia (ICA) has been working to persuade local councils and shires to provide their most detailed flood data to the insurance industry in order to assist risk-based pricing. The ICA incorporates this data into the National Flood Information Database (NFID). Insurers can now determine flood risk at the individual address level in almost every part of the country. In some instances the data is detailed to ground floor height.
The ICA believes the risk-based pricing model is the fairest for both consumers and insurers. It results in policyholders paying a premium that most accurately reflects the level of risk to their individual home. For the more than 90%of Australian households at low or zero risk of flooding, risk-based pricing is very much to their financial advantage as they are not being asked to cross-subsidise the policies of homes facing greater flood exposure. When flood data is outdated or inadequate, insurers are required to price their premiums for the worst-assumed risk. In many cases, insurers have not known about flood-prevention mitigation that protects some communities or have had inadequate knowledge of mitigation effectiveness.
Once data is provided and included in NFID, it has a number of positive effects. It enables insurers to more precisely calculate flood risk and offer competitive premiums – in many cases this risk is lower than previously assumed, and consumers have experienced significant reductions in their premiums.
It sends a price signal to the market, helping to make consumers and governments more aware of the impact that flood risk is having on their insurance premiums.
It can also discourage inappropriate development and encourage governments to consider investing in permanent mitigation to reduce the impact of floods on communities.
The most significant policy change that emerged from subsequent reviews of the disaster was the creation of a standard definition of flood to be used across the Australian general insurance industry. The definition, drafted by the Federal Government in consultation with the ICA, was introduced in 2012 and has brought legal certainty to both policyholders and insurers.
The definition of flood is:
• 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.
Some consumer advocates proposed to make flood cover mandatory for all household insurance products. However, the ICA advocated that consumers should be able to choose whether to purchase flood cover. Now, more than 93 per cent of household policies purchased have flood cover (up from only 3% a decade ago). Consumers can choose between products that automatically cover flood, products that allow them to opt out of flood cover, and products that do not cover flood at all.
For those Australians who live in areas of high to extreme flood exposure, the application of risk-based pricing means they pay premiums that are often higher than they would like. It is for these policyholders that government mitigation work is most crucial.
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