Commission calls for insurers to better explain nat cat cover

A Royal Commission into Australia’s natural disaster planning has warned insurers and the government have to get better at ensuring the population understand what insurance can and cannot provide.

The Royal Commission into National Natural Disaster Arrangements , presented its report to the Australian parliament and it contains 80 recommendations on how the country can better prepare for what it warns will be more frequent and more severe events as climate change continues.

“Achieving an effective national approach to natural disasters requires a clear, robust and accountable system capable of both providing a comprehensive understanding of, and responding to, the aggregated risks associated with mitigation, preparation for, response to and recovery from natural disasters.” said Mark Binskin Chair of the commission. “Such a system must have unbroken linkages in place from the highest levels of government to individuals in the community; provide decision makers with timely, consistent and accurate information; be structured for decisions to be made at the most appropriate level; allow decision makers to understand and mitigate all risks so far as reasonably practicable; enable stakeholders to understand the residual risk and inform others so that they may take appropriate actions; and it must be resourced to fulfil these functions.”

He added: “Unprecedented is not a reason to be unprepared. We need to be prepared for the future.”

Thirty-three people died, including six Australian firefighters and three American aerial firefighters, in the wildfires in the country which spanned the end of 2019 and early 2020.

Thousands of homes were destroyed or damaged. Smoke blanketed much of Australia, including capital cities, and contributed to hundreds of deaths. Nearly three billion animals were killed or displaced, and the fires harmed many threatened species and ecological communities.

“For many communities, the bushfires were not the only disaster they faced that summer,” said the report. “After the drought and the fires came storms and floods, and before the last fire was extinguished, Australia announced its first case of COVID-19. Australia’s ability to coordinate nationally, learn and adapt, in the face of deep uncertainties and rising risks, had been tested.”

It added there are compelling reasons for state and territory governments to continue to be responsible for disaster management.

“They have considerable experience, capacity and capability to manage natural disasters. Our witnesses did not call for the Australian Government to ‘take over’ this work. Many praised state and territory agencies, and the Australian Government acknowledged that it should ‘enhance and support, not supplant’ the capabilities of the states and territories.”

“Natural disasters have changed, and it has become clear to us that the nation’s disaster management arrangements must also change,” added the report. “Extreme weather has already become more frequent and intense because of climate change; further global warming over the next 20 to 30 years is inevitable. Globally, temperatures will continue to rise, and Australia will have more hot days and fewer cool days. Sea levels are also projected to continue to rise.

“Tropical cyclones are projected to decrease in number but increase in intensity. Floods and bushfires are expected to become more frequent and more intense. Catastrophic fire conditions may render traditional bushfire prediction models and firefighting techniques less effective.

“Natural disasters are expected to become more complex, more unpredictable, and more difficult to manage. We are likely to see more compounding disasters on a national scale with far-reaching consequences.

“Compounding disasters may be caused by multiple disasters happening simultaneously, or one after another. Some may involve multiple hazards – fires, floods and storms. Some have cascading effects – threatening not only lives and homes, but also the nation’s economy, critical infrastructure and essential services, such as our electricity, telecommunications and water supply, and our roads, railways and airports.”

As such Australia needs to be better prepared for these natural disasters, cautioned the commission. “They may not happen every year, but when they happen, they can be catastrophic. The summer of 2019-2020 – in which some communities experienced drought, heatwaves, bushfires, hailstorms, and flooding – provided only a glimpse of the types of events that Australia may face in the future.”

The Reserve Bank of Australia (RBA) reported that “inflation-adjusted insurance claims for natural disasters in the current decade have been more than double those in the previous decade”. Insurance claims for cyclones Debbie and Yasi, in 2017 and 2011 respectively, amounted to over AUS$1.5 billion each, and the claims in relation to widespread flooding in Queensland in 2010-11 amounted to around $2.4 billion.

As of 27 August 2020, around 38,500 claims (including building, contents and commercial insurance claims) had been lodged as a result of the 2019-2020 bushfires, totalling an estimated $2.33 billion.

“The RBA expects that the insurance industry will be increasingly exposed to natural hazard risk as the climate changes,” added the commission. “The RBA expects that this impact will grow over time, and may create barriers to efficiently pricing insurance, which would adversely affect the insurance industry, consumers, businesses and governments. The 2020 Severe Weather in a Changing Climate report by Insurance Australia Group (IAG) and the National Centre for Atmospheric Research (NCAR) noted that climate change is expected to ‘substantially increase the frequency and intensity of weather and climate extremes’.”

“To make Australia more resilient to natural disasters demands action on multiple fronts,” said the report. “We need to do much more than put out fires. A resilient nation will seek to mitigate the risk of disasters through a wide range of measures, and it will attend to all of the complex and sometimes long-term consequences.

“The extent of damage and harm caused by natural disasters depends not only on the intensity of the hazard itself, but also on a range of other factors, such as where people choose to live, how they build their homes, how public and private land is managed, and how well people and communities are prepared, supported and cared for during and after disasters.”

Turning to insurance and its role the commission said more had to be done to explain to those exposed to natural disaster risk exactly what can and cannot be covered. This included the Australian government explaining its role in the recovery efforts post any natural catastrophe.

“The general insurance market is complicated,” it said. “Any government intervention in the market can have positive and negative consequences that need to be carefully considered before action is taken. For example, changes to the regulatory architecture to mandate a more comprehensive level of basic coverage could lead to increases in insurance premiums, and, in turn, this decreased affordability could have the unintended effect of pushing more people to cease their insurance or to underinsure.”

It highlighted the National Disaster Risk Reduction Framework lists improving the accessibility, variety and uptake of insurance as a key goal for risk reduction.

“Our observations and recommendations are focused on insurance as a risk management tool in relation to natural hazard risks. We have focused on four main issues affecting the ability of insurance markets to assist in the management of natural hazard risks efficiently and effectively. These are:

  • increasing premiums and other factors, which are potentially leading to issues with under- and non-insurance, decreasing the overall effectiveness of insurance as a tool to manage natural hazard risks
  • issues in relation to data and information that are potentially impeding the ability of insurers to price risk through premiums accurately
  • the complexity of insurance, which is potentially impeding the ability of households and businesses to make informed decisions, and
  • taxes on insurance, which can cause market distortions and potentially reduce the extent of insurance coverage.”

It added: “As insurance puts a price on risk, reducing risk by undertaking mitigation and resilience activities should help lower insurance costs and premiums. We have seen that insurance is responsive to large-scale risk mitigation activities, such as the construction of a flood levee, but individual-level mitigation activities are often not recognised by insurers. The insurance industry has called for greater investment in mitigation and this should be reflected in the pricing of premiums.”

The Commission warned insurers, state and national governments had to do more to reward those who took steps to improve their risk management and resilience to natural perils.

“We would expect that improvements to data will be reflected in premiums, including reduced premiums where governments, homeowners and business take action to mitigate risk.”

However, the report warned that to ensure that government and insurers were able to accurate rice and assess risk there needed to be a more standard level of data across the country.

“There are significant inconsistencies across the nation in much of the information and data that governments and others need to make informed decisions about managing natural disaster risk,” it said. “There are confusing and unnecessary inconsistencies in some of the information provided to the public. Greater consistency in emergency warnings and air quality information, for example, is clearly necessary.”

It continued: “Clear risk information can help people make better-informed decisions about, for example, where to buy and live, how to design and build homes, and how to manage land. Governments should develop ways in which natural hazard risk information can be better communicated to the public – particularly to people who are making decisions that will affect their exposure to those risks. For example, those selling a home might be required to disclose this type of information to prospective purchasers.”

The commission added individual needed to take more responsibility for the management of the risks they face and this could only be done with support from external agencies and government.

“It can be dangerous for people to assume that others will always be there to help during a natural disaster,” it said. “Even the best prepared and resourced governments and fire and emergency services cannot entirely protect the public from the impact of natural disasters.

“Some bushfires, for example, will be too widespread; some Australians will live too remotely; and there are only so many firefighters, aircraft and trucks that can be deployed at the same time. Furthermore, governments and charities by no means cover the cost of rebuilding uninsured homes and replacing other property lost in natural disasters.

“There are also practical and economic reasons for individuals to take some personal responsibility for their own risk exposure. They are best placed to make many decisions about how to manage risks to their own homes, health and wellbeing. They also have the legal authority to make many of these decisions, and the incentive to choose the options that most closely align with their ‘risk appetite’.”

“Natural disasters have changed, and it has become clear to us that the nation’s disaster management arrangements must also change,” added the report. “Extreme weather has already become more frequent and intense because of climate change; further global warming over the next 20 to 30 years is inevitable. Globally, temperatures will continue to rise, and Australia will have more hot days and fewer cool days. Sea levels are also projected to continue to rise.”