By Julian Bajkowski

When the chief executive of the Insurance Council of Australia (ICA), Rob Whelan, took to the airwaves in late January 2013 to take councils in Queensland to task over flood protection measures, it was the opening shot in a war of words between local government and the risk industry that had been threatening to erupt for years.

In a nation where human perseverance against nature’s challenges and extreme weather are intrinsic to Australia’s cultural identity, the gloves had now come off in the battle between the mainstream community and corporations that are supposed to provide a financial safety net for those stricken by adversity beyond their control.

Queensland’s summer floods of 2012/13 have become a defining event for communities, government and businesses – not just because they occurred, but because they followed another horrific deluge in 2010/11 in which 35 people died and more than 70 towns were hit including the state capital of Brisbane that was inundated to a degree few had ever imagined.

As the waters subsided, those who calculate the risks and returns of insurance immediately started to recast the numbers that form the odds on which the price of insurance premiums or even the availability of policies and coverage is based.

Many, including insurers, are now wondering how frequent so-called ‘once in a hundred years’ floods will now be, given the recent sequence of extreme weather events.

No matter where you stand on climate change, what is clear is that many insurers don’t like what they see ahead and are adjusting their spreads and exposures in an attempt to balance the competing interests of shareholders expecting dividends on one side and policyholders wanting protection on the other.

Caught in the middle are financially constrained councils who are being increasingly accused of doing far too little to mitigate risks and allowing developments in flood-prone areas.

Today even the very definition of a flood from state to state is so hotly contested that it prompted a federal intervention by Financial Service Minister Bill Shorten to create a nationally consistent definition.

“I think councils should think very hard about what their development plans are and their town planning and where they put these developments and what type of structures do we put there?” the ICA’s Rob Whelan told ABC Television’s Lateline program on 28th January.

In the same interview, Mr Whelan took issue with the level of flood mitigation measures in areas including Ipswich, Gympie and towns in the Lockyer Valley as well as Bundaberg.

“The risk there was about the insurer identifying that there was this constant inflow of floods into those particular communities and those communities, localcouncils, etcetera, were doing nothing about mitigating that risk, about preventing that risk,” Mr Whelan told the ABC.

Citing the example of New South Wales riverside towns like Grafton and Lismore which have flood levee banks, Mr Whelan described this year’s flooding of Bundaberg as a “a catastrophe.”

“Those people are not protected, they're exposed to that risk. It's an enormous flood. The water's moving very rapidly there,” Mr Whelan said. “So those poor people are really exposed and something in the order of 2,000 households have now been damaged.”

They were hardly comforting words for those left mopping up after the disasters.

For many Queensland councils, the ICA’s overtly aggressive public affairs tactics amounted to little more than sledging, blame shifting and even misinformation.

It was not the first collision either. In January 2011 the Local Government Association of Queensland hit out hard at ICA statements over the provision of flood maps, or otherwise, it felt served to try and get insurers off the hook for shoddy treatment of flood victims.

“False claims by the Insurance Council of Australia that local councils were withholding flood mapping from insurers are a ruse aimed at deflecting blame for the sector’s insensitive treatment of flood victims,” the LGAQ said.

LGAQ chief executive Greg Hallam claimed Brisbane City Council and other local governments had provided “publicly available” flood mapping data for many years.

“Councils prepare flood studies to assist them in emergency response, not as a service to insurance companies,’’ Mr Hallam said. “Insurers are in the business of risk assessment and make healthy profits by selling products accordingly.’’

The problem for many insurers is that in recent years those profits are not what they used be, partly because extreme weather events including Hurricane Sandy in the United States are wreaking havoc in areas previously thought safe.

Against this stormy backdrop, councils in Queensland are certainly not just hoping for better weather next year. The LGAQ openly admits that there are hard questions to answer around improving infrastructure and communities to ensure that post-flood rebuilding is not just washed away again.

“In terms of flood mitigation, the LGAQ has long argued that disaster funding arrangements needed to acknowledge that investing in rebuildingflood damaged assets to a better standard produced long term savings for taxpayers,” the LGAQ said in a statement provided to Government News.

“Some progress in having this argument accepted has been made. The LGAQ will keep working to convince the Federal and State Governments that more needs to be done to meet the challenges in ensuring the state’s flood and cyclone defences are as strong as they can be.”

But a compounding issue is that flood mitigation is an expensive up-front investment, even if it pays off in spades in the future. The LGAQ argues that everyone has to come to the party for it to become a reality.

“All levels of government need to commit to it,” the LGAQ said. “In the long run it is a good investment if it protects vulnerable communities from being devastated again and again by natural disasters.

Like many states, councils in Queensland have typically not insured infrastructure like roads, bridges and underground assets such as pipelines according to the LGAQ, noting that “approaches to the market over the years have consistently shown that insuring such assets is not feasible.”

“Long before recent natural disasters, the potential for significant costs to arise from weather related damage to roads has been well known,” the LGAQ says. “There is virtually no interest from insurers in being exposed to such costs.”

Where councils do insure property like buildings, plant and machinery, costs are also on the rise. In late 2012 the Mayor of Cairns Regional Council, Bob Manning, publicly flagged his concerns over the premium increases to council, a sentiment likely to be shared across Australia.

The financial pressure placed on councils like Cairns by spiralling premiums is illustrated in the official documentation recommending that what insurance policies are available be renewed.

“There is very little appetite for local government business and this is further exaggerated in Far North Queensland,” a Governance Committee summary on Cairns Regional Council’s 2012/13 insurance policy renewal says.

“The brokers have advised that Council’s incumbent insurer, Vero Insurance, was the only insurer prepared to participate in providing quotes for the insurance renewal.”

The document reveals that the cost of Cairns’ insurance rose to by more than 13 per cent to $1.3 million for 2013, a distinctly unlucky set of numbers.

Compounding this year’s increase was a rise of more than 50 per cent in 2012.

A similar story was played out at Cassowary Coast Regional Council and Tablelands Regional Council who were also forced to absorb insurance premium hikes of similar or larger levels.

Everyday residents – and not just in Queensland – are also being hit hard by steep premium rises on an increasingly questionable basis.

Consumer watchdog Choice has been monitoring what it terms “extreme” rises in insurance premiums and potential gouging around flood cover after a surge in complaints and tip-offs.

Choice Investigations Team Leader Andy Kollmorgen told Government News that the level of unsolicited complaints received recently were an “order of magnitude” above those usually received and this had prompted the organisation to put a call out to readers.

“What we’ve established with a high degree of certainty is that the insurance industry is trying to price people out of the market at any conceivable risk of flood.”

Causing further irritation is the blanket manner in which potential flood risk is determined by insurers that often does not take into account topography. Mr Kollmorgen says the tools insurers use can be “clumsy and primitive” and that Choice has heard from people “that live on a hill”
being hit with charges for flood cover.

Sometimes postcodes can form the basis putting a property flood risk, a questionable measure if ever there was one.

“Many policy holders are being told they are getting flood cover whether they like it or not,” Mr Kollmorgen says.

Since there are no regulations controlling premium increases or how companies assess risk, it really comes down to a customer service issue, Mr Kollmorgen says.

"Instead of credible explanations from the companies they've been paying premiums to for so long, these long-term customers have received shocker renewal notices and then been forced to deal with clueless, and often outsourced, customer service reps."

Choice is not the only public interest advocate carefully watching the behaviour of Australia’s insurance sector. In February 2012 the House of Representatives Social Policy and Legal Affairs Committee handed down a thumper of report titled: In the Wake of Disasters: Volume One: The operation of the insurance industry during disaster events.

Triggered by what committee chairman Graham Perrett MP called “the deluge of complaints about the insurance industry that was falling on deaf ears” the committee travelled around Australia to take evidence from those dealing first hand with the aftermath of natural disasters. “We found that often the insurance claim process had a detrimental effect on people already devastated by trauma and loss,” Mr Perrett said on the occasion of the report’s release.

“Unfortunately there are no regulations that compel insurance companies to do the right thing by their clients and resolve claims in a timely and satisfactory fashion,” Mr Perrett said.

The report itself was even more scathing.

“Victims of extreme weather events all over Australia faced unacceptable delays in the assessment of their claims; misunderstandings about the scope and extent of their polices; a lack of information or communication from insurers; discrepancies or inaccuracies in damage assessments or third-party expert reports; and token efforts at dispute resolution,” the reports introduction says.

“Those who tried to assert their rights in the labyrinth of the claims process found themselves on the wrong side of a power imbalance.”

To redress the imbalance, the committee made 13 recommendations that have called on the government to implement a raft of measures aimed at fixing problems when people are dealing with insurers. At the top of the list was a call to introduce and enact legislation to increase consumer protections in insurance claimshandling and settlement.

On top of that, the committee called for the government to “work closely with the Insurance Council of Australia to strengthen their Code of Practice, particularly for times of natural disasters, and to make the Code of Practice compulsory.”

The stick of reputational damage was also applied to the industry in the form of a call for new powers so the Australian Securities and Investments Commission will have the power to ‘name and shame’ insurers who breach the Code of Practice. But perhaps most tellingly, the report called for measures to “address the rising costs and potential market failure of insurance premiums.”

In its formal response to the inquiry the office of Minister for Financial Services and Superannuation, Bill Shorten, said it “has established a joint industry-Government action group, the Insurance Reform Advisory Group. It is tasked with addressing evidence of rising insurance costs/market failure issues in specific areas.”

In response to the call to name and shame insurers, the government said that “notes that the Insurance Council [of Australia] has agreed that Annual Reports of the Code Compliance Committee will be publically released on the Insurance Council website.

It has called on an independent review of the General Insurance Code of Practice, the ICA’s primary self-regulation instrument, to conduct “an assessment of the pros and cons of naming insurance companies that have breached the Code, and the types of breach; and reporting the annual number of Internal Dispute Resolution and External Dispute Resolution cases for each insurance company.”

Whether significant changes can be made by the insurance industry to address the potential for market failures and surging premiums for communities and their councils, not only in Queensland but across Australia, remains to be seen.