Flooded with problems

Flooded with problems

After a benign summer severe floods have elevated concerns about cover affordability, land-use planning and disaster impacts

By Wendy Pugh

Politicians were fast out of the blocks in warning insurers against being “tricky” and calling for “a bit of humanity” as floods inundated parts of eastern Australia, in a sure sign they expect issues from the disaster to remain hot topics well after the waters recede.

Homes and businesses on the New South Wales midnorth coast and in the Hawkesbury-Nepean Valley west of Sydney took the brunt of the mid-March catastrophe, which was also declared for southeast Queensland.

Claims totals had reached $500 million by early this month and are likely to top $1 billion based on less extensive impacts from an east coast low last year and the Townsville floods in 2019.

NSW Premier Gladys Berejiklian described the inundation as 1-in-100-year flooding in parts of the state while terming the impact west of Sydney as a 1-in-50year event.

The catastrophe, following the Black Summer bushfires a year before, has generated similar concerns about insurance affordability and lack of cover, while also presenting issues specific to the peril. That includes questions about the way flood cover is offered and claim tensions over whether storm or other inundation caused damage.

Sydney’s urban expansion in the affected Hawkesbury region is also adding heat to the debate about why poorly planned development keeps putting people in danger of such events and how the risks can be reduced.

Australian Financial Rights Legal Centre Director of Casework Alexandra Kelly says early feedback suggests there will be confusion over whether damage in specific instances is covered and it’s likely some people will have chosen not to take out flood cover due to cost or lack of availability.

“For bushfires you either did or didn’t have insurance, rather than the specific event of bushfire being excluded,” she tells Insurance News. “The fact that some people are just not covered for flood will have an impact.”

The insurance industry adopted a standard flood definition after the 2011 Brisbane disaster, describing it as the covering of normally dry land by water that has escaped or been released from the normal confines of lakes, natural watercourses, reservoirs, canals or dams.

But often claims have elements of damage from both storm and flood, and assessments of the causes after combined events keep hydrologists busy and sometimes require Australian Financial Complaints Authority dispute resolution.

Aftermath: residents clean up debris in the Sydney suburb of Windsor Credit: Reuters/Loren Elliott

Depending on the insurer, the brand and the location, flood may be a compulsory part of household cover, offered on an opt-out basis, provided up to a low value of damage, or not provided at all.

NSW Police and Emergency Services Minister David Elliott and Federal Emergency Management Minister David Littleproud had turned their focus onto the industry and policy wordings even before assessors were permitted to enter flood-affected areas.

Mr Littleproud called on insurers to “show a little bit of humanity and have a social conscience” when asked on Sky News Sunday Agenda whether firms should “cut people some slack” over policies in the current circumstances.

“People entered into these contracts in good faith, and we would expect insurance companies to act in good faith,” he said. “Obviously contractual law takes precedence in this country but we just say to the insurance industry ‘please, you have an opportunity to build your reputation here’.”

Mr Elliott had a similar message.

“After every disaster, we see insurance companies trying to reduce their payouts by being tricky with their wording, and my strong advice to them is don’t do it because we have very strong laws in this country to protect those policyholders,” he said.

The industry’s handling of disasters was put under scrutiny during the Hayne royal commission, but the Insurance Council of Australia (ICA) points out more than $7 billion in claims associated with natural disasters have been paid in the past three years.

“In this and past disasters the insurance industry supports the community to get back on its feet,” a spokesman told Insurance News. “ICA responded to the extreme weather in NSW and southeast Queensland by quickly declaring insurance catastrophes, thereby giving priority to affected policyholders.”

ICA has encouraged policyholders regardless of cover levels to contact their insurers, as they may be eligible for emergency assistance or temporary accommodation.

Natural catastrophe affordability worries in recent years have centred on cyclone-prone north Queensland, but flood issues were examined in an inquiry after the 2011 Brisbane disaster, which was exacerbated by the release of waters from the Wivenhoe Dam.

A proposed reinsurance pool was never adopted, but the idea continues to be debated. The Australian Competition and Consumer Commission has recently recommended against the concept in the northern Queensland context. Insurers are mostly against, although Allianz is supportive.

High risk area: Port Macquarie was hit hard by the floods Credit: Matt Gilligan for Suncorp Group

Allianz Australia Chief Corporate Affairs Officer Nicholas Scofield says flooding since the Brisbane catastrophe has more commonly affected regional areas, such as in Lismore after Cyclone Debbie, and cover and affordability concerns have received less attention.

“We always knew the next time there was a really large-scale event, particularly one that touched a metropolitan area, that the issue would come roaring back,” he tells Insurance News. “It is fair to say we are in the calm before the storm at the moment about the price of flood cover.”

Allianz says some 97.5% of its policyholders in the NSW flood-affected area have opted out of flood. The insurer has taken an optional approach, ensuring homeowners facing affordability pressures can still take out cover for other household risks.

The industry generally has faced scrutiny in the media recently over reports of householders in high-risk areas facing insurance bills of $30,000 or being asked to pay $13,000 for flood cover.

ICA and company executives have highlighted the realities behind higher pricing for riskier areas and the need for mitigation investment and improved land-use planning.

IAG says it aims to use the latest available data to assess a property’s risk of being impacted by flood, rainwater run-off and storm surge, and adjust premiums based on that. Data comes from a range of sources, including the National Flood Insurance Database, specialist hydrology and terrain mapping, council mapping and flood studies, where available, and insurance claims information.

“We understand the importance of insurance being as affordable as possible for people and communities, and that is also an important part of our thinking around calculating our customers’ premiums,” a spokesman said.

The Hawkesbury-Nepean Valley area is known as one the largest potential flood risk areas in Australia given urban development pressures and its unique geographical features.

Five major tributaries act like taps pouring water into the valley during a flood, while a series of choke points cause water to back up in a “bathtub effect”, rather than flowing more quickly out to the ocean.

The Warragamba Dam, constructed as a reservoir for Sydney’s water supply rather than as a flood mitigation tool, also spills into the system after heavy rainfall events.

A NSW Parliamentary select committee is currently enquiring into a controversial proposal to raise the height of the dam wall, taking into account flood mitigation issues and environment and heritage impacts.

ICA this year said it no longer supports raising the wall after meetings with traditional owners at key sites, and is advocating for exploration of alternative mitigation options to reduce the risk.

Suncorp Chief Executive Steve Johnston says floods too frequently devastate communities across Australia, with towns in NSW among the latest examples, and the nation as a whole must address the risk.

“Unfortunately, many homes in Richmond, Windsor, Penrith, Port Macquarie and Taree are in medium to very high flood risk areas,” he says.

Known danger: in August 2011 Insurance News investigated “Australia’s biggest flood risk” – the Nepean-Hawkesbury catchment – and plans to add new suburbs in the area. Ten years later, nothing much had changed

“As a country we need to address how we can protect homes in flood-prone regions through government investment in mitigation infrastructure. We must also improve planning decisions to ensure we are not building new homes in high-risk areas.” Risk Frontiers suggests the often-u sed 1-in-100-year benchmark is not helping as it doesn’t clearly reflect the risks. In reality, there could be centuries with no such events or multiple disasters of the nominal magnitude.

Senior Risk Scientist Thomas Mortlock and General Manager Resilience Andrew Gissing say the term provides a false sense of security to those behind levees or a seawall by implying such a sized event is unlikely in a lifetime.

“It also suggests that if we were unfortunate enough to experience this type of event, then we won’t be due another for at least the next 100 years,” they say in an article republished in the Maglog section of this magazine (see page 66). “Both of these concepts are fundamentally wrong and lead to a malaise in risk awareness and preparedness.”

Risk Frontiers argues that natural hazard risks should be discussed in terms of annual exceedance probabilities, suggesting that talking about a 2% chance of being flooded in any given year has greater immediacy than references to a 1-in-50-year flood zone.

IAG Executive Manager Natural Perils Mark Leplastrier says rare high-risk and high-impact events like the heavy rain and flooding just seen are often not in living memory for most people, and they are devastating when they occur.

“Going forward, as called out by the Royal Commission into National Natural Disaster Arrangements, we want to make sure everyone who brings expertise in understanding these events and the impacts, including insurers, banks, governments, councils and builders, are at the same table, sharing their data and insights to improve land planning and mitigation,” he tells Insurance News.

“In the past the focus has been on life-saving measures, but we also need to analyse the wider financial risks and impacts on business.”

Education is also key in making sure people are aware of their risks, he says.

The latest flooding occurred as a La Nina system, typically associated with wetter weather in eastern Australia, was starting to fade. Greater Sydney rainfall was slightly above average in recent months, while NSW had its wettest summer since 2011/12.

A coastal trough off the east coast and a stalled high pressure area in the Tasman Sea in mid-March combined to cause the rainfall and flooding, while tropical moisture feeding down from the north contributed to the event.

By March 21 the Bureau of Meteorology was warning about “a dangerous flooding situation” evolving across parts of Sydney and eastern NSW. The bureau estimates that over a seven-day period nearly 75,000 gigalitres of water reached the ground in the state – 150 times the volume of Sydney Harbour.

Ratings agency AM Best says that for insurers an increased frequency of extreme weather events, including floods, bushfires, and hailstorms may see a greater focus on climate risk, while also upping the ante on robust underwriting, capital management and enterprise risk management.

“These actions may ultimately lead to tightening of terms and pricing increases for policyholders as insurers refine underwriting appetites,” it says in a report.

Losses from the latest flooding will likely put pressure on underwriting margins this financial year and dampen insurer earnings, it says. Reinsurance will absorb a lot of the total losses, but on the downside for insurers there could be upcoming pressure on rates at catastrophe program renewals.

S&P Global Ratings says Australia’s largest underwriters are well protected by reinsurance, that an influx of claims will be manageable and the three largest primary insurers have “relatively low retentions” in the $150-250 million range before catastrophe cover kicks in.

“The destruction caused by this disaster is clear.”

While discussion continues about the wider issues and impacts, insurers have emphasised they are moving as quickly as possible to assist customers in the wake of the catastrophe and as flood waters have receded.

“The destruction caused by this disaster is clear,” Mr Johnston says. “Homes have been severely damaged and many residents have lost all their personal belongings. This recovery will take some time, which is why it is so important that our assessors and builders are already on the ground working with our customers, particularly in the hardest-hit areas.”

The insurance industry can be certain of more intense scrutiny over the next few months as the clean-up continues and debate increases over how Australia is dealing with the rising costs of natural catastrophes.

It won’t be surprising if politicians, under pressure within their constituencies and fighting their own battles, look to direct a bit more heat in the insurance industry’s direction along the way.

“They know there is a problem with affordability of flood cover,” Mr Scofield says. “If a politician is going to pick sides between a flooded consumer and an insurance company you don’t have to be a master of political science to work out which side they are going to take.”