Insurance Cannot Do It Alone

Journalists and politicians keep taking shots from the free throw line but who loses in the end?

It has been flavour of the month (let me change that to year) to bash the insurance industry in Australia particularly over the issue of flood. For the record in 2011 dollars the Insurance Industry paid out approximatel $510 million in 1974 Brisbane Floods and approximately $2,400 million in 2011 Brisbane Floods. This is 370% more in 2011 and yet the flood was 34% less in height (6.7 metres in 1974 compared to 4.43 metres in 2011). Before I go on I stress that all the $ figures have been adjusted for inflation to 2011 dollars.

Part of the reason for the increase is that as the population of Australia increases, councils, developers and society in general are pushing for more urban density. We have more building per sq kilometre now than we did back in 1974. Research conducted by the University of Queensland estimate that if the 1974 floods had been the same (lower) height of the 2011 floods, 7,900 buildings would have been affected. As it was 14,900 buildings were directly affected by the floods. This increase of 89.7% which explains some of the increase of the insurance payout.

Another part can be put down to the increased size of Australian homes from 1974 to the present. Larger homes, mean more contents and greater cost if that property is lost or damaged.

Clearly, the combined effect of larger and more buildings do account for some of the increase in insurance payouts, but it is only part of the answer. To my mind it is also due to the fact that flood cover was much more readily available in the Australian market, in particular Brisbane in 2011 than in 1974. This was brought about by a number of insurers including but not limited to Zurich Insurance (commercial), Suncorp, Ansvar, Mansions/Calliden, and TIO (Norther Territory only), leading the way.

Instead of being acknowledged for doing the right thing the industry has been demonised by the media and used as a scape goat by Federal, State and Local Government. Several government enquiries have been held and recommendations for regulation and compulsory flood cover have been made.

The Insurance Council of Australia have stated that of the more than 130,000 claims lodged arising from the Queensland catastrophes in January and February 2011, this includes the Brisbane floods, Toowoomba floods, central Queensland floods and Cyclone Yasi, only about 900 (that is just 0.7%) have been referred to the Financial Ombudsman Service (“FOS”).

Yes some people did not have flood cover but in many cases they were either not insured or elected not to take flood coverage due to the increased cost for insurance of this peril. Insurance is pooling the risk and when flood is the biggest cause of property losses in Australia naturally there is going to be a premium charged for the risk by any and every insurer.

Another group of people only bought insurance from the cheapest carrier. Research in the United Kingdom suggests that around 19% of the population purchase insurance that way. I have no sympathy for these people for like most things in life you get what you pay for. Insurance is not like buying milk. It is not all the same. (Even milk is hardly the same these days). With insurance you are buying protection and every one of us has to be certain that what we are buying is what we actually need to protect us.

Having said all this, I also accept and have seen that a small percentage did get incorrect advice.

But I am diverting of what prompted me to post this article. Government does not wish to keep investing in the infastructure to allow the continued growth of our cities. To allow more and more suburbs means more hospitals, schools, rail lines, roads and freeways, etc. It is far less expensive to allow the redevelopment of inner city suburbs. By tricks like hiking up land tax on these properties, it really forces existing owners to redevelop or sell.

By a combination of rezoning rural, park and other vacant land along with allowing multi buildings on the one title grasslands, parks, farms, and worst of all wet lands which act as a sponge to soak up rain water is being replaced with roofs, roads, car parks all of which drain into the already overstretched and under maintained storm water pipes and waterways.

As a result (and leaving climate change aside) we all see, read about and hear of many more cases of localised flooding.

The insurance industry cannot be expected to foot the bill with multi-billion dollar bail outs particularly in areas where buildings should never have been allowed to build. In some rural communities the cost of flood mitigation would be much less than the cost of repairing the damage from just one flood. Yet some of the communities have been flooded multiple times over the past 2 years.

We desperately need a national approach to the issue of flood. It needs a partnership approach between government at all levels and the insurance industry and not the media nor the government finding fault in private enterprise which has demonstrated clearly from 1) the amounts paid out, 2) the continual high credit rating of Australian insurers and 3) the continuing increase in the availability of flood that their has been no market failure in the Australian insurance industry. To suggest otherwise as has been done of late by the media shows a complete lack of understanding of the facts by journalists more interested in peddling a depressing story than getting the facts right.

This of course plays right into the hands of government who do not have to accept responsibility for their actions or inaction as they have someone to blame, the general insurance industry.

An industry, that no matter what it says, is seen as the enemy due to the continuing media bashing and yet an industry has done so much for the Australia economy and to those that were prudent enough to insure properly.

We are starting another year in Australia with wide spread flooding. Blaming the insurance industry may sell a few newspapers and cheap magazines but it will not fix the problem. I genuinely believe the only way is through the partnership approach between government at all levels and the Australian insurance industry.

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