History repeating

History repeating

Early indications suggest large numbers of bushfire victims will once again be underinsured

By John Deex

When Susan Templeman’s beloved Blue Mountains home was razed to the ground by 2013’s bushfires, her initial shock turned to relief, because she was insured.

But that relief was quickly blown apart when Ms Templeman, the Federal MP for Macquarie, found out her cover was way below what she needed to rebuild.

“I was shattered to find out that we underinsured by about 50%,” she tells Insurance News. Ms Templeman had arranged her insurance years before, based on the market value of her home, and had no idea there was a huge gap between her sum insured – the maximum an insurer will pay – and the cost of a rebuild.

The primary cause of the issue was the enforcement of new bushfire building standards, brought in following previous severe fire seasons.

Bushfire Attack Level (BAL) ratings dictate how a home should be rebuilt, often resulting a much higher cost of materials. But many consumers just don’t know about them.

It’s a devastating problem. Many homeowners are left with little option but to take a cash settlement, and leave homes and communities behind.

Worst of all, it’s still happening today, years after the new rules were brought in. It’s estimated that 80% of this season’s bushfire victims will be underinsured.

University of Wollongong experts Christine Eriksen and Eliza de Vet highlighted some of the key issues in a recent paper, titled When Insurance and Goodwill are not enough: BAL Ratings, Risk Calculations and Disaster Resilience in Australia.

Their findings were informed by interviews with victims of the 2013 fires, but they say the problems haven’t gone away.

“There is no indication as to why it would be any different this time around compared to the Blue Mountains event,” Dr Eriksen told Insurance News. The insurance industry argues that selecting a sum-insured is ultimately a decision for the customer, and that it provides online calculators to help them.

But the researchers don’t agree, accusing the industry of failing to keep consumers properly informed.

“We know from our Blue Mountains research that some people had used online calculators and still ended up being significantly underinsured,” Dr Eriksen tells Insurance News. “The conversation doesn’t seem to be happening with insurers. It seems like it would be quite simple to say ‘you are in this BAL level, it could impact on your rebuild in this way’.

“I can’t speak to why insurance companies don’t have that conversation.”

The research paper says all homeowners in bushfire-prone areas need to be aware of BAL ratings, and their implications. But it says access to information about costs, responsibilities and liability “has been scant”. “At the bare minimum, insurers should, as part of their ‘duty of care’, provide consumers with BAL information when advising on sum-insured costs and policy renewals,” the paper says.

“This includes incorporating a question into online calculators and sales advice transcripts, which provides BAL advice and access to resources, as well as requiring consumers to acknowledge that they have been made aware of BAL ratings and associated standards and costs.”

Ms Templeman says she checked insurance calculators repeatedly after finding out she was underinsured, and for years they were still providing incorrect assessments.

She accepts that improvements have been made since 2013, with some calculators asking specific questions about bushfire – but it’s not enough.

“The education piece is missing,” she says. “If you try to have a conversation about BAL ratings with an insurance salesperson, it is not on their script.

“They are asking consumers to take all the risk when they have no real information.” Of course, encouraging people to increase their premium is not usually a successful sales strategy, and insurers also worry about straying into personal advice.

The research paper says local councils should also use “existing communication avenues” to advise residents in bushfire-prone locations about BAL ratings and insurance. “Without such initiatives by insurers and councils, it may take more tragic disasters to incite change.”

The researchers suggest a move from sum-insured to full-replacement policies could provide more certainty for customers. “There is no doubt that the people in the Blue Mountains that had full-replacement policies were the best off, both financially and emotionally,” Dr Eriksen tells Insurance News. But such policies are the exception rather than the rule in Australia, and a largescale shift could lead to significant increases in premium.

IAG Executive General Manager Short Tail Claims Luke Gallagher says the industry is “always concerned” about underinsurance. He says IAG’s home buildings calculator does help bushfire-threatened customers estimate the cost of a rebuild.

“A key question we ask customers in our calculator is the proximity of their home to bushland, highlighting that new regulations require home construction to meet specific standards for certain Bushfire Attack Level (BAL) zones, so that their sum-insured takes into account these costs if they are unfortunately impacted by a bushfire.

“We also provide advice on our websites for our customers to help them prepare for the potential impacts of bushfires, including actions they can take to reduce risks to help protect themselves, their family and their home and property.”

IAG doesn’t offer full-replacement policies. But it says it does give underinsured customers the option of sitting down with a partner builder to discuss designing a new home from the sum insured available.

Pushing for action: Ms Templeman says insurers must work with governments to prevent underinsurance

“It is going to keep happening unless we take a collaborative approach.”

“There’s also flexibility for the customer to modify their new home and, importantly, this helps them to begin rebuilding their lives within their local community,” Mr Gallagher says.

Suncorp says providing more information to customers during the quoting process might not result in improved levels of cover. “Many customers are focused on how much we will charge without wanting to dive into details about cover adequacy,” a spokesman says.

However, Suncorp says its calculator remains “a useful tool” and adds that it has previously run “major awareness campaigns” aimed at educating customers about the risks of underinsurance, including the impact of BAL ratings and building codes.

The AAMI brand does offer full-replacement cover, and Suncorp also offers policies including a “safety net feature” which boosts the sum insured by up to 30% in the event of a shortfall.

“To further reduce the cost impact of new building standards, including BAL ratings, our home insurance policies include an additional benefit, of between 10 and 20% on top of the sum insured, for other costs related to rebuilding to current regulations and laws,” it says.

Despite all these efforts, there is general acceptance, even among the insurance industry, that the issue of underinsurance will again surface as this season’s bushfire claims are settled.

The Australian Financial Complaints Authority says it is too early to estimate how many complaints it will receive related to underinsurance following the fires.

The Insurance Law Service, which is part of the Financial Rights Legal Centre, says it “tends to get a big run of calls” six to nine months after a major event, and it expects the same this time.

“There is still a lot of misunderstanding about the risk,” Director of Casework Alexandra Kelly tells Insurance News. “Sometimes insurers know more than the consumer, but they are worried about giving personal advice.”

The researchers’ view of the future is bleak.

“In the absence of clear, informed public discussions around BAL and its insurance implications, bushfire survivors will continue to be confronted by unexpected costs when seeking to rebuild burned-out properties,” the paper says.

And Ms Templeman won’t be a bit surprised if underinsurance flares into a major issue again and again.

It’s a depressing example of failing to learn the lessons of history, but she doesn’t lay all the blame at the insurance industry’s door.

“There is a role for governments to work with the industry to get this sorted,” she says. “It is going to keep happening unless we take a collaborative approach.”

In some ways, Ms Templeman was one of the lucky ones. She was able to free up funds from another property to finance a rebuild on the same block.

But she estimates two-thirds of those who lost their homes were unable to rebuild. “About one-third bought an older home nearby, while another third moved away completely,” she says.

“I still have empty plots either side of me.”

A taxing issue

BAL ratings aren’t the only cause of underinsurance; many people are forced into it by affordability issues.

In New South Wales these problems are exacerbated by high levels of tax on insurance and the Emergency Services Levy (ESL). NSW is the only mainland state that still funds emergency services through a levy on insurance.

The Insurance Council of Australia (ICA) estimates that taxes account for more than 50% of premiums in the state, and that as a result it’s the worst area in the country for underinsurance and non-insurance. The industry believes any inquiries in the wake of this bushfire season offer a chance to reassess taxes and the levy, as was done in Victoria following Black Saturday in 2009.

“There is real concern in the community about the level of underinsurance and non-insurance,” National Insurance Brokers Association Chief Executive Dallas Booth says. Mr Booth believes it will be “critically important” for any official inquiry to examine the impact of taxes and charges on insurance, “and the extent to which these taxes and charges are adding to the affordability problems of insurance cover”.

“The Emergency Services Levy in NSW is a major burden being carried by policyholders,” he says. “NSW must follow Victoria and make these long overdue reforms.”

NSW, Victoria and South Australia have already announced state-level inquiries into the bushfire season.

ICA says inquiries should address levels of underinsurance and non-insurance, “including the effect that state taxes and levies have had on the cost and purchase of household and business policies”.