The Flood Risk – What has changed in Australia ?

1. The Flood Risk – What has changed in Australia ? XIV LATIN AMERICAN CONGRESS OF INSURANCE LAW - C.I.L.A CUBA - APRIL 7 – APRIL 10 2015 Christopher Rodd – Senior Fellow Law Faculty – Monash University Melbourne AUSTRALIA

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3. Natural Disaster Insurance Review Inquiry into Flood & Related matters • Review undertaken in 2011 at the request of the Australian Federal Government and Chaired by John Trowbridge • Submissions made by consumer groups & advocates, insurers independently and insurers as a group through the ICA (Insurance Council of Australia)- over 100 written submissions Federal Government prepared a consultation paper titled ‘Reforming Flood Insurance – November 2011 • Terms of Reference also gave the committee the opportunity to independently review issues relating to insurance including the possibility to subsidising insurance in high risk areas. • The report released in Sept 2011 included a number of key recommendations Presentation title

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5. . • That an agency sponsored by the Commonwealth Government be created to manage the natural coordination of flood risk management & to operate a system of premium discounts and a flood risk reinsurance facility, supported by a funding guarantee from the Commonwealth • That all home insurance, home contents and home unit insurance policies include flood cover “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” Presentation title

6. That a system of premium discounts be introduced in order that most purchases of home insurance, and home contents insurance policies in areas subject to flood risk, be eligible for discounts against the full cost of flood insurance • The Commonwealth Government guarantee the payment of claims by ensuring that whenever a funding shortfall occurs in the reinsurance facility, the Commonwealth would meet the shortfall. • INDUSTRY RESPONSE • Flood insurance should not be compulsory – only 7% of residential property in Australia is exposed to repetitive flooding • Flood insurance now readily available for every domestic property in Australia since 2006. 60% of policies selected by consumers have flood cover

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9. Mandated cover unfair for properties with no flood risk • A Government flood pool will raise the cost of living • Property owners who face high flood risk due to lack of government flood mitigation & land use planning decisions should receive direct premium subsidies from government • Map, mitigate & manage the risk to reduce community exposure • Industry will improve community understanding of flood options through the adoption of a standard definition of flood • insurers will provide a Key Facts Statement with all home contents policies sold • Industry to provide a public portal to enable consumers to evaluate flood risk to their property Presentation title

10. Industry will provide governments with a geo-coded database of known flood prone properties across Australia • Will act as agents of the government for government funded premium subsidies • Will provide public access to information on flood mitigation risk • Amend the General Insurance Code of Practice to address key issues outlined in the NIDR recommendation* Presentation title

11. ….. So what has happened ? • Extensive flood mapping Australia wide with heavy concentration of data in flood prone areas • Standard Definition of “flood” in insurance contracts mandated under the Insurance Contracts Regulations (1985) • Flood insurance is now readily available on domestic contracts • Based Insurance Council of Australia (!CA) data ( as at March 31 – 2013) – of 4.64 million domestic contracts , 3.93 million had flood cover as standard ( approx 85%) • 359,000 had opted out of flood cover • 4.16 million policies have active flood cover either as standard or have purchased cover Presentation title

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13. Federal Government, through GeoScience Australia, have created a national flood risk information portal , enabling consumers to access data on the flood risk for individual properties • Data largely confined to residential areas ( rather than remote rural ) • Insureds in low risk areas generally receive flood cover at no cost • High and moderate risk areas are priced based on risk profile and prior flood experience • No cross subsidization – ie low risk properties are not funding high risk • Insureds in high risk areas continue to assert that flood and cyclone insurance is unaffordable - pricing remains a contentious issue in Far North Queensland .(FNQ) Presentation title

14. Australian Securities and Investment Commission (ASIC) and Federal Government are seeking to introduce a North Queensland home and contents , comparison website to enable insureds to source “affordable cover “ • Many major insurers refusing to provide data re their pricing, asserting that the comparator sites do not reflect claims experiences and focus purely on price rather than coverage.. or an insurers claims handling record • Federal Government threatening to permit Unauthorised Foreign Insurers ( UFIs) to write cover in the domestic market in Australia as a means to enable residents of FNQ to obtain low cost cover • Insurers argue that UFIs likely to only accept risks for modern buildings with the best cyclone proofing .Industry concern as to lack of regulation of UFIs ? Presentation title

15. Aggregators and UFIs • Australian Securities and Investment Commission (ASIC) and Federal Government are seeking to introduce a North Queensland home and contents , comparison website to enable insureds to source “affordable cover “ • Many major insurers refusing to provide data re their pricing asserting that the comparator sites do not reflect claims experiences and focus purely on price rather than coverage or an insurers claims handling record • Federal Government threatening to permit Unauthorised Foreign Insurers ( UFIs) to write cover in the domestic market in Australia as a means to enable residents of FNQ to obtain low cost cover • Insurers argue that UFIs likely to only accept risks for modern buildings with the best cyclone proofing .Industry concern as to lack of regulation of UFIs ? Presentation title

16. Lloyds of London , is allegedly supporting the Federal Government proposal to allow unregulated Foreign insurers into the domestic market . • The proposal is that any business written by UFIs, would be through the regulated broker market – presumably designed to ensure that in the event of an insurer default or financial failure, the insured may have a remedy against the broker ??? • The External Dispute Resolution body, the Financial Ombudsmans Service ( FOS ) has expressed concern as to the involvement of UFIs in the Australian market and also the Govt support for Aggregators – consumer protection concerns • Australian insurers have expressed similar concern as to the regulation of UFIs and Aggregators (Comparator web sites ) Presentation title

17. Flood Mitigation Measures • Mitigation focused on adequacy of SW drainage systems – improving capacity • Construction or re engineering of flood levees – while these work effectively in small floods .. Not as effective in large floods • Tri partite mitigation strategies in all flood affected states – Flood mitigation measures funded by Federal , State and Local Government. • Limitations on future development in flood plains. • Little done to make infrastructure more flood resilient by either relocation or strengthening. • Relocating communities – eg Grantham and Gundagai • USA , China and Netherlands are instigating reforms based on the concept of ecosystem management – “ making room for the river “ – widening and deepening Presentation title

18. There remains a heavy reliance on the insurance industry to address the problem by “simply making affordable insurance widely available” • Insurers still reluctant to insure in flood prone areas • Insurer participation dictated by evidence of sustainable measures taken by govt authorities to reduce flood risk – eg Roma in Queensland. • Insufficient funds allocated to flood mitigation strategies –eg 2012 /13 Queensland Govt alllocated $41.9 million on 4 programs while Federal Govt allocated $104.4 million over 4 years … Contrast this with $9 billion spent by Federal Govt to re build Q’land following the 2010/11 floods. • Many areas of Australia still vulnerable to extreme flood risk with no simple infrastructure solution – eg Hawkesbury –Nepean Valley • Still a high level reliance on emergency procedures ..not mitigation ! Presentation title

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20. …. And the future ? • Studies suggest Australia may be ravaged by more La Nina and more El Nino events as the impacts of climate change take hold (Journal “Nature- Climate Change” ) • Predictions La Nina events will occur 1 in 13 years , this century ( currently I in 23 ) • El Nino is associated with severe flooding • World Meteorological Organisation says 2014 hottest year on record globally and 14 of the 15 warmest years have occurred in the last 100 years . • For Australia it is predicted that we will experience storms/cyclones of greater severity and also .. greater frequency. Presentation title

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