Prof. Allan Manning

Reduce funding of ASIC when the Royal Commission showed up so many problems and risk from natural disasters continuing to be ignored

When I started this blog I did not have any intention of discussing political issues but wanted to focus on general insurance. I am into politics and do not belong to any political party nor do I vote for the same party at each election. I try and make an informed decision based on the promises of each side.

With this background, decisions by governments do impact on general insurance which in turn is there to protect the Australian economy, our communities right down to individual business and home owners.

Last week I was questioning the huge hidden tax that the Terrorism Levy has become.

This week I join the group of Australians who cannot understand why the Federal Government has reduced funding to the Australian Securities Investment Commission at the same time the Royal Commission has uncovered so many problems. I will let you draw your own conclusion.

The other great disappointment in the budget is that the investment in addressing the increasing risk brought about by climate change, i.e flash flooding, cyclone damage etc has been ignored. As a country we will pay for this big time in the long run. If you compare Australia’s investment in this space to Canada’s you can see the leadership required to address this very real issue in our country is way out of step.

Yes there are some good things in the budget but these two issues are of great concern and really do need to be rethought.

We all deserve better than short term politics. We need some statesmanship with a genuine investment, not only our future, but that of our children and grandchildren.

Enough said, hopefully back to some technical insurance stuff tomorrow!

Read Me View comments

Wear Orange Wednesday – WOW Day – Wednesday 23rd May 2018

This Wednesday is WOW day, Wear Orange Wednesday, an initiative by the SES who are encouraging everyone to wear something orange to work or school to show your support for the SES volunteers.

 

Who are the SES?

“The State Emergency Service (SES) is the name used by a number of volunteer organisations in Australia that provide emergency help during and after declared (natural or otherwise) disasters, typically flood, storm or tsunami. The SES also assist in other emergencies, such as vertical and road crash rescue and medical emergency. In other scenarios the SES may provide a support role to other agencies, particularly police and fire. The SES is operational 24 hours a day.”

Source: https://en.wikipedia.org/wiki/State_Emergency_Service

 

They aren’t asking for much and I think in any way we can thank and show support for the wonderful work our SES volunteers do, we should get behind.

I hope all of you can show some support with the hashtag on all social medias #THANKYOUSES

They have made a brochure with some other things you may like to do to help support, here.

 

Some other things to look out for on the day that may be turning orange include:

NSW – Don’t be surprised to see an orange dinosaur on the M1 Pacific Motorway at Somersby as Ploddy from the Australian Reptile Park gets an orange facelift.

VIC – Landmarks in Melbourne and across the country will be ‘flooded’ in orange this WOW Day in support of SES volunteers, including the MCG, AAMI Park, Bolte Bridge and the Melbourne Star.

WA – A number of iconic locations across the State will be lit up in a magnificent orange in support of the SES volunteers, including the Bell Tower, Elizabeth Quay, Parliament House, Yagan Square and Perth Concert Hall. Why not also take a drive by the Swan River in Nedlands to see how the Eliza Statue is showing her support?

 

 

Read Me View comments

Terrorism Levy – Another hidden tax on insurance – You will be surprised just how much – a whopping 45% of terrorism levy collected.

Where do we start on this thorny issue…

Point 1.

Report after report urges governments to remove taxes on insurance. The Federal Government’s Productivity Commission inquiry on “Competition in the Australian Financial System” released earlier this year is the latest to do so. In fact, every time the issue has been looked at, going right back to the Royal Commission into the collapse of HIH, has made this recommendation.

Point 2.

I strongly believe the way that the terrorism levy is determined on Australian businesses is seriously flawed. While I have written on this many times, I would explain that the fact that the Terrorism Levy is based on a percentage of the premium fails to match the rate of the levy with the risk.

Insurance premiums on property and business interruption are determined by a large number of variables with natural catastrophe losses being a major determinant, but other factors such as investment income, claims ratios in general, to name a few, are all involved. During bad years for the insurance industry, like the year we had the Brisbane Floods, Cyclone Yasi, and 6 other declared natural disaster events (2010) premiums increased. Despite the risk of terrorism falling during the same period, the terrorism levy did not reduce to counter the effect of the increase in premiums. This has, in effect, created a giant windfall to the pool.

Then, when premiums started to fall again 5 years later with normal competitive forces in the Australian Insurance Market, the pool had to increase the terrorism rates in 2015. The current rates are now:

  • 16 per cent for Tier A, [ the Central Business District in Sydney, Melbourne, Brisbane and other cities with a population over 1,000,000 – interestingly not Canberra]
  • 3 per cent for Tier B, [Urban areas of all State capital cities and cities with a population of over 100,000;
  • 6 per cent for Tier C. [Those postcodes not in Tiers A or B]

The reason for this was that as insurance premiums fell the current percentage rate applied to insurance premiums to determine the levy was insufficient.

Now with a toughening market, premiums have been on the rise for some time but the rates did not reduce in the last review and will not for at least the next three years.

The key issue here is that the levy is not linked to the risk of terrorism, it is linked to the vagaries of the insurance market. If any other product was priced this way ASIC or APRA would be, I suggest, having a field day.

It is worse for those in NSW and Tasmania as the fire service levy is charged on not only the premiums but also the Terrorism Levy.

As an aside, I would hate to be a business along George Street in Sydney which is seeing the tram upgrade works drag on and on, being hit with higher insurance premiums, the terrorism levy and a fire service levy that was promised to be removed.

Point 3.

Now where is the terrorism levy going?

The 2017 Annual Report, (See: ARPC_Annual_Report_2016-17) which shows Australian Reinsurance Pool Corporation (“ARPC”) paid the government $147.5 million in 2016/17 as a dividend, and since the start of the scheme the ARPC has paid the government $697.5M in fees and dividends.

Page 46. Table 2.15 shows Gross Premiums written for 2016/17 was $121.9 million, (which is less than $147.5M paid to the government). If this is not a tax then I do not know what is.

Year to date $1.545 billion has been paid in terrorism levy with the government being paid $697.5M. This is a whopping 45%. I am sure every Australian insurer would love a dividend of 45% of premium income. I would start an insurance company myself!

My argument is that the Federal Government needs to start with itself and reduce the hidden tax on Australian businesses.

In fairness, the report does say that the retrospective portion of the dividends (no dividends were charged in the early years) is set to end in 2018.

I would like to see the entire dividend dropped and the value of the pool increased to the point that the level of reinsurance could be reduced and the levy itself reduced. This is on top of a fairer system of calculating the levy introduced, one linked to risk not a percentage of premiums.

 

Read Me View comments

Insurers forget “utmost good faith” at our peril

I get so frustrated when I see dishonesty in any part of the insurance claims process. I fully support all efforts to stamp out genuine claims leakage and dishonesty on the part of the Insured and or repairers who milk the system. But equally if an Insurer is acting with scant disregard to the principle of utmost good faith I am equally appalled.

Before I outline a situation that prompts me to write this post, I want to explain what claims leakage actually is.

One definition is:

Claims leakage is defined as the difference between the actual claim payment made and the amount that should have been paid if all industry leading practices were applied. • Leakage is caused by deviations from established industry or company standards and leading practices. [Source Ernst and Young].

I do not like this one as it speaks of ‘established industry or company standards’ which in themselves may be stacked against the Insured. I have never liked the way that jewelry is insured as it is stacked against the Insured paying premiums on sums insured jewelers and insurers know the Insured will never get all of. You would be staggered at how many people think they have been ripped off by their insurer following a jewelry claim but many in the Industry justify it as it has always been done that way.

Another is:

Dollars lost through claims management inefficiencies that ultimately result from failures in existing processes (manual and automated). In other words, it’s the difference between what you did spend and what you should have spent on a claim. The cause can be procedural, such as from inefficient claim processing or improper/errant payments, or from human error, such as poor decision-making, customer service, or even fraud. Claims Leakage is often discovered through an audit of closed claim files. [Emphasis mine – Source: International Risk Management Institute, Inc]

My own definition is:

Claims leakage is the difference between the amount paid on a claim compared to the Insured’s genuine entitlement under the contract of insurance.

I am the first to appreciate that Insurers pay directly or indirectly, vasts amounts of money to builders, panel beaters and a raft of other suppliers and trades. As such they are in a good position to negotiate favourable terms on the basis of the quantity of work directed to them and also the fact in some industries that payment is guaranteed.

At the same time this cannot be an abuse of power and drive businesses into the red or creating a situation where the only way the supplier or trade can make a reasonable profit is by cheating the Insured. I.e quoting for 2 coats of paint and only applying one is a common example. Another is not replacing all the damaged building parts that are not normally visible, that is say wall or ceiling framing.

It appears that at least one insurer has done a deal with a flooring contractor to supply and lay carpet. This is fine.

An Insured suffered damage, lodged a claim and the supplier produced a quotation that was sent direct to the Insurer. The Insured was then offered a cash settlement and found that no other carpet company could do the work for the amount quoted. In desperation the Insured went back to the original company that provided the quote only to be told that they could not do the work for the amount quoted.

Finding that they could not get their damaged carpet replaced The Insured pushed and finally received a copy of the quotation. As it is the Insured’s home, they should be provided this to ensure it is the same quality as before, that what was quoted they receive etc but it was only when the Insured really pushed and would not take no for an answer did they finally get the quotation.  This is what was written at the top of the quotation:

 

Note: this is an image of the exact words and not my retyping the words but I have removed the name of the firm pending possible legal action.

You can image how the Insured feels about their insurer, the repairer and the insurance industry in general. It just adds to the stereotype image of our industry.

When we were appointed we contacted the repairer and they were very upset the client had their original quote. We asked for a quote from this repairer that they would honour and despite their promises, we have never received a quote.

Stepping away from this claim for a minute. If an Insured submitted a quotation like this in reverse, that is that it clearly did not fairly represent the true loss suffered by the Insured, i.e. in the case of an Insured knowingly submitting a quote higher than the true value, it would be regarded as a serious breach of the principle of utmost good faith.

Why is it any different for the Insurer? If it can be proved that, what you could be forgiven for thinking, that is the Insurer has entered into an arrangement that appears to be allowing them to low ball genuine losses, then to me it is a serious breach of the utmost good faith principle. How many other Insured’s have been short changed by this arrangement?

And we continue to wonder why insurance rates so poorly on the trust scale.  I keep coming back to the words of Lord Mansfield more than 250 years ago:

“Good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.”

If any reader finds that they or one of their clients is in the same boat as here, please insist on a copy of the quotation and certainly do not accept any offer until it is received and or you are satisfied that you can have the work done properly for the amount offered. All of us in the industry have a duty to protect the insuring public and brand insurance.

For my part, I will meet with the Insurer and see if I can get this one sorted fairly.

 

Read Me 4 Comments

Product Recalls Australia – 16 May 2018

This week’s product recalls includes the following:

Volvo Group Australia — UD Trucks – Quon

Read more

Red Kellys No 1 Pty Ltd — Red Kellys Tasmania Creamy Caesar Dressing

Read more

American Special Vehicles — RAM 2500 (DJ) and 3500 (D2) Trucks

Read more

FCA Australia Pty Ltd — 2004-2007 (KJ) Jeep Cherokee

Read more

FCA Australia Pty Ltd — 2018 (KL) Jeep Cherokee equipped with 2.4L (ED6, ED8) engine

Read more

Aldi Stores — oh so natural Almond, Cashew and Cranberry Bites

Read more

Plum Products Australia Pty Ltd — Plum Premium Metal Nest Swing with Mist

Read more

Read Me View comments

Guest Post – What does home insurance cover?

I often get requests from people and organisations seeking to make a guest post on my site. Unless it is meaningful and is not a straight product flog I will certainly share and embrace their articles. (You would be staggered how many requests I get from gambling sites).

This guest post is from Alex at Lendi.com.au.

What does home insurance cover?

 

The Wye River bushfires that took place in 2015 on Christmas Day destroyed over a hundred homes, with The Insurance Council of Australia at the time estimating total losses to be worth $38 million.

Property losses were significant, and while government grants were given out to those who were unable to return to their home, $1,300 would not have made much of a difference to the many homeowners that turned out to be underinsured.

According to data from RACV Home Insurance, 65% of the members who had their homes destroyed by the fires were underinsured, some by over $100,000. This is an alarming reminder of the importance of understanding your home insurance policy and what it does and doesn’t cover.

 

Home insurance and contents insurance

 

So, what does home insurance cover ? Well, there’s a reason it’s also referred to as building insurance. Most policies do not protect your personal belongings, but rather cover the cost of repairing or rebuilding the actual building structure itself, including any outer buildings, garages, and permanent features within the home, such as light or a built-in wardrobe.

It provides you with financial protection against external events that are out of your control, such as natural disasters including fire damage, hail, and wind, or man-made damages including vandalism, arson, and theft.

However, you should be aware that most policies do not cover particular events such as earthquakes and floods. If you live in an area where these events are more likely to occur, then you may need to take a closer look at your policy options.

If you want your personal belongings covered in case they are damaged, lost, or stolen, then you would need contents insurance. This covers personal possessions in your home such as electrical equipment, clothes, furniture, tools, and jewellery. Many homeowners bundle their home insurance policy with contents insurance into a combined policy so that way everything is covered.

As for home insurance policies, there are two different types to choose from:

Total replacement cover

Total replacement cover is a type of home insurance that, as the name suggests, covers the cost of rebuilding your property to the state it was in prior to being damaged. This is the best option if you want to reduce the risk of being underinsured.

However, only a few insurers currently offer total replacement policies, and you may find that it takes some time to receive the funds if you are to suffer a total loss, as a full assessment will need to be carried out by the insurer to calculate the cost of rebuilding the property.

Sum-insured cover

A sum-insured cover is the more common home insurance option and will only cover you up to a set amount to rebuild or repair your property. The set amount is selected by you and often referred to as ‘the sum insured.’

Since you can only receive up to a set amount, there is a higher risk that you will be underinsured, as most people do not have the expertise required to accurately work out how much it would cost to rebuild their home.

It should also be noted that limits, caps, exclusions, and other conditions vary between insurers, so when you are choosing a policy be sure to ask questions and carefully read the product disclosure statement. Take your time to shop around, so you find the best cover for your needs.

Homeowners that do not fully understand their insurance policies could end up finding themselves to be underinsured at the time disaster strikes. Be sure to do your research and read over the fine print. You don’t want to end up losing your home because of a natural disaster, only to find that you won’t be able to afford the repairs.

As well as taking the time to understand your insurance cover, you should also make a point of regularly reviewing your policy, as over time life circumstances can change, along with your possessions and your home.

Think back over the last year before you blindly renew your policy. You would be surprised at how many homeowners forget to mention an expensive home renovation to their insurance providers. Failure to do so could leave you at risk of not being adequately covered, so it’s worth taking the time to review your policy on a regular basis.

 

_______

 

Thank you for sharing Alex.

I would support the position that with some no sum insured policies the time taken to finalise the claim in the event of a total loss can be much longer to agree than with a sum insured policy. I ended up working with around 12 such people following the Wye River fires being engaged around 12 months after the fires. Most disagreements were over the amount of reinstatement.  It is therefore important to use both LMI PolicyComparison.com and LMI ClaimsComparison.com to compare the features and benefits and also the claims service as part of your decision making process.

Read Me View comments

New General Insurance Product Class introduced on LMI RiskCoach

Hazard Index from LMI RiskCoach showing all 13 classes of general insurance including Corporate Travel for the insurance broking as the occupation.

I am pleased to advise that the team at LMI Group have now added Corporate Travel as the 13th class of general insurance on which we provide risk and insurance information to our subscribers through LMI RiskCoach.

Besides a wealth of general information about this important class of insurance we have included Corporate Travel in the Hazard Index and Risk Specific questions and points to consider for over 5,000 occupations.

The idea behind introducing Corporate Travel to LMI RiskCoach is to assist insurance brokers and advisers to introduce this class of insurance into the conversation with their clients and use this as an aid to selling, an education piece and as a protector of their professional indemnity program.

The reason we chose Corporate Travel is due to the amount of travel people in Australia and New Zealand undertake and the sheer volume of claims that arise in this class.

We already have Corporate Travel up on LMI PolicyComparison.com and LMI ClaimsComparison.com in Australia and while we have leisure travel up as well on LMI ClaimsComparison.com we are working on this as a complete new class on LMI PolicyComparison. I will post an article when this massive piece of work is completed.

Regular users of the popular site will see that we have changed the name of “Machinery and Electronic Breakdown” to simply Equipment Breakdown in line with current market practice.

RiskCoach on the Go is also being updated with these changes and we will advise when the changes, which have to go through the relevant app stores, are completed.

The team at LMI and I would like to thank the invaluable assistance we received from the team at TravelCard Real Time Travel Insurance in developing this entire new product class on LMI RiskCoach.

Read Me View comments

Business Continuity Awareness Week 14 – 18 May

As part of my doctoral research into how small and medium enterprises can, with the assistance of the insurance industry, better manage a crisis, I came to appreciate the benefits of business continuity plans.

They not only are of great benefit at the time of a critical event, in that they allow an organisation to manage the crisis better and therefore recover quicker, they also have a lot of other benefits.

In my own businesses, it forces me to spend time on working on the business itself and not just be caught up in the myriad of day to day issues that I am doing in the business.

By adopting a risk management approach to all decision making, it makes me think about the threats to the organisation as well as the benefits that may arise. I then work out how I can better maximise the opportunities benefits while minimising the threats.

Through this research and going through the process now for over 10 years, I have become a champion of Business Continuity Management Planning and therefore strongly support the Business Continuity Institute’s Business Continuity Awareness Week.

The whole reason I did the research study in the first place was to reduce the number of businesses that failed after a major insurable event. While many of the books, services and even this blog that I developed since then have been to aid people better understand risk and insurance, it was the business continuity piece that proved to be the most difficult.

While there are consultants available to assist organisations through the process, the cost is prohibitive to most small and medium enterprises. At the other end of the spectrum there are free templates available but they offer no advice and I have seen companies struggle to try and put something together over 2 years of trying.

To find a middle ground I developed LMI ContinuityCoach.com which has just been revamped and released for trials as Version 2.0. This provides much more than just a paper template but rather the smart form technology we have in LMI BIcalculator which us allows us to coach the user through the process. The new version produces a detailed insurance report which links back to LMI RiskCoach and captures the necessary information to assist the broker and the Insured determine their insurance needs, looking at it from the point of view of adequate protection. Using LMI ContinuityCoach internally has certainly been one of the reasons for the ongoing success of LMI Group.

If you would like to learn more about LMI ContinuityCoach or business continuity in general please do not hesitate to write via the comments section or the ask me a question section.

Read Me View comments

Which small businesses have mandatory data breach reporting obligations? + 1st Quarter statistics

Another topic I have written a lot on is the Federal Government’s mandatory reporting regime.

I have been asked many times to explain the obligations on small business and so I outline them below. After that I provide some stats at a high level on the first quarter reporting.

From 22 February 2018, the Notifiable Data Breaches scheme (“NDB scheme”) requires a wide range of organisations to report data breaches that are ‘likely to result in serious harm’ to the individuals whose personal information is affected by the breach. They will also be required to notify the Office of the Australian Information Commissioner (“OAIC”).

The NDB scheme applies to organisations that already have obligations to secure personal information under the Privacy Act 1988 (Privacy Act). Generally, this does not include small businesses that have a turnover of $3 million a year or less.

However, there are a few exceptions. Organisations that fall under the following categories will have mandatory data breach reporting requirements, regardless of their size:

  • Health service providers (including, for example, private hospitals, day surgeries, medical practitioners, pharmacists, allied health professionals, gyms and weight loss clinics, childcare centres, and private schools);
  • Organisations that trade in personal information;
  • Credit reporting bodies;
  • Employee associations registered under the Fair Work (Registered Organisations) Act 2009;
  • Organisations that opt-in to being covered by the Australian Privacy Principles under section 6EA of the Privacy Act.

The NDB scheme will also apply to small businesses in these categories that are based overseas if they have an ‘Australian link’.

[ Note An Australian Link generally extends to the overseas activities of an Australian Government agency (s 5B(1)). It also applies to organisations (including small businesses covered by the Act, outlined above) that have an ‘Australian link’ (s 5B(2)). An organisation has an Australian link either because it is, in summary, incorporated or formed in Australia (see s 5B(1A) for more detail), or where:

  • it carries on business in Australia or an external Territory, and
  • it collected or held personal information in Australia or an external Australian Territory, either before or at the time of the act or practice (s 5B(3)).

Further information about entities that are taken to have an Australian link is available in Chapter B of the APP Guidelines.]

Tax File Number (“TFN”) recipients (which is any person in possession or control of a record with TFN information) will also need to comply with the NDB scheme in relation to their handling of TFN information. This means that if TFN information is involved in a data breach, a TFN recipient will be obligated to meet the requirements of the NDB scheme.

Organisations that are not covered by the NDB scheme are encouraged to use the information on notifying individuals under the scheme to create or review their data breach response plans.

Being transparent when a data breach occurs is central to meeting community and consumer expectations. 94% of Australians believe they should be told when a business loses their personal information. Informing individuals about a data breach is one step that organisations can take to demonstrate that they take their responsibility to protect personal information seriously.

And as a practical measure, notifying individuals at risk of harm can provide them with the opportunity to reduce their chances of experiencing harm. For example, individuals can resecure compromised online accounts. This can reduce the potential impact of a data breach overall.

As always, I recommend every business and or organisation to review or develop a business continuity management plan and obtain, and or review their, Cyber Insurance and to discuss the many and varied options available with their insurance broker.

Now to the Ist Quarter reporting stats:

Key statistics from the first quarterly report include:

  • Top five sectors that notified the OAIC of eligible data breaches included health service providers (24 per cent of notifications), legal, accounting and management services (16 per cent), finance (13 per cent), private education (10 per cent), and charities (6 per cent).
  • 78 per cent of eligible data breaches were reported to involve individual’s contact information. 33 per cent were reported to involve health information and 30 per cent to involve financial details.
  • 51 per cent of the eligible data breach notifications received indicated that the cause of the breach was human error. 44 per cent of breaches were reported to be the result of malicious or criminal attack, and 3 per cent the result of system faults.
  • 59 per cent of data breach notifications reported that the personal information of between one and nine individuals was affected. 90 per cent of data breach notifications related to breaches involving the personal information of less than 1,000 individuals.

The key point for me here is that just over half were through human error. No matter what systems we have in place, it is people risk that is our greatest risk in so many areas of our organisations and cyber security is no different!

 

Read Me View comments

Different landlord – similar issue

This is another issue that I have posted warnings on several times over the past few months.

It was reported recently that a Perth landlord was hit with a huge power bill after tenants ran a cannabis grow-house from his property.

The power bill was a whopping $85,000.

The report suggested crime gangs are most likely to target private landlords and will often provide a large upfront cash payment to cover several months of rent. While this is obviously good for cash flow reasons, there are heightened risks if regular full inspections are not made.

The way they organise themselves such a payment allows time for tenants to set up the growing operation.

On a different point, why a landlord would retain the electricity account in their name is beyond me.

Any landlord caught this way could face significant losses.

Apart from the damage and clean-up costs, affected landlords are exposed to loss of rental income while the home is being repaired, as such it can have a devastating financial impact.

Landlord’s need to protect their valuable investment and income stream with a quality policy designed specifically for landlords. The cost of insurance is a legitimate tax deduction and my strong advice is to seek the advice of a quality insurance broker.

Having said this, picking the wrong tenant who racks up a huge electricity or water bill is typically considered a business risk that is not insurable.

Read Me View comments