Last Friday, the government inquiry into insurers’ response to the 2022 floods released its final report. The 86 recommendations include calls for new legislation, changes to the General Insurance Code of Practice, standard hazard terms and some government intervention.
The inquiry’s chair, Daniel Mulino MP (pictured above), told Insurance Business that the proposed reforms are “a significant step forward” for the industry.
The recommendations, he said, can be divided into four broad groups.
Mulino said some “go directly to insurers” and how they can immediately improve operational practices and protocols.
Others strengthen the Code and will “dovetail”, he said, with the independent review of the Code that is currently in progress.
“Then a number relate to regulatory arrangements, such as standard definitions and the data gathering and publication powers of ASIC [Australian Securities and Investments Commission],” said the inquiry’s chair.
The final grouping, said Mulino, requires the government to consider intervention in the industry, for example, to improve insurance affordability.
One recommendation calls for registration of the Code with ASIC and making it enforceable through insurance contracts. IB asked what that means in terms of the enforceability of a voluntary Code?
“Whether it's enforceable is kind of tricky,” he said. “It's not enforceable in the sense of legislation.”
Mulino said codes like this are designed to be industry rules but not legal obligations. However, he said the Code already “does have some teeth.”
For example, Australian Financial Complaints Authority (AFCA) decisions can impose penalties of tens of thousands of dollars. The Code Compliance Committee, he said, can also inflict penalties of up to $100,000 for Code breaches.
“What we're recommending is that we kind of up that a bit,” said Mulino.
He said during the public hearings the Insurance Council of Australia (ICA) said it was willing to register the Code with ASIC for approval.
“But in addition to that, we think that it [the Code] should be contractually enforceable through the PDS,” said Mulino. “It's important to note that the banking code has both of those characteristics.”
There are also data gathering recommendations that concern outcomes measures. For example, he said, customer satisfaction ratings based on the time it takes for insurers to respond after a natural disaster. These would require insurers to report this data to ASIC “at a suitable frequency.”
“This is data that the insurers should largely be collecting anyway, so we don't think that it's going to be overly cumbersome,” said Mulino.
Mulino said the recommendations can be characterised by dividing them into three ‘Ps’: policyholders, pooling and preparation.
These proposals, he said, aim to improve the efficiency and fairness of insurers when they deal with policyholders. For example, when insurers receive claims from vulnerable people or dispute a claim.
He said pre-existing damage disputes can be a “fundamental issue” in many of these cases.
“The policyholder pays premium for possibly decades and then when you pull the floorboards up after a flood, it's basically a lottery as to who gets paid out,” said Mulino. “It just doesn't seem like a sensible risk allocation to me.”
Poor quality expert reports were often raised as a concern during the hearings. They were often the basis for rejecting claims, he said, but regularly made no clear link between maintenance issues or wear and tear and the observed flood damage.
In the report, the recommendations call for “Clearer regulatory guidance in relation to the preparation of expert reports where these impact on the decision as to whether to grant a claim.”
Mulino said in some situations after a nat cat, too much risk is put on the policyholder. He gave the example of temporary accommodation.
“Lots of policies have a six-month or 12-month limit on temporary accommodation,” he said. “I think that's highly problematic, where quite often the rebuild can take much longer than that.”
In those cases, he said, vulnerable families who could be experiencing trauma are not “best placed to bear that risk.”
“This is an instance of a risk that is not being sufficiently pooled,” said Mulino.
The Committee, he said, wants insurers to assume this risk and the cost of temporary accommodation for as long as it takes to complete the rebuild.
This concerns reducing underlying risks.
For example, Mulino said insurers’ granular data has identified very high risk properties and the result is they are being priced out of the insurance market.
“I think that government intervention is going to be required in some form,” said Mulino. “You can't get rid of it [the risk] but we can materially reduce it through community level mitigation, through household mitigation, where the insurers pass on premium reductions when households demonstrate they've undertaken the investment.”
All three levels of government, said Mulino, also need to stop new developments in high risk areas.
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