By Scott Osberg, Underwriting Team Leader – IPL
Some cover – like Lumley’s Home and Landlord’s insurance – automatically includes full flood risk. Others automatically include flood but provide policyholders with opt-out options.
Unlike many other risks, flood is a location specific peril. Proximity to natural water courses, topography (whether the property is high on a hill or at a low point), and floor height above ground level are all key factors in underwriting flood risks. That’s why it’s important to provide insurers with a detailed description of the property’s exact location and height above the ground – so an accurate assessment can be made of these combined risk factors.
If a property is located in a high risk location, it’s worth investigating if there are any devices available to help minimise flood damage. For example, flood doors/gates/boards to create a physical barrier, non-return valves to prevent back-flow from sewers and pipes, and sumps and pumps to drain sub-floor basements and car parks. While these might not reduce the premium or make a property more insurable, they can help to significantly contain the damage and/or clean-up costs.
The issue of flood has plagued Australia since early colonial times. In 1819, Governor Macquarie ordered settlers to avoid building their residences and stockyards in known flood-prone areas noting “many of the deplorable losses would have been in great Measure arrested had the Settlers paid due consideration of their own interests”.
As Macquarie observed nearly two centuries ago, building in flood-prone areas is best avoided. Over the years, local planning authorities have often played a key role in exacerbating the flood problem by approving development in high risk locations.
According to a paper released by the Federal Government in 2011 called ‘Reforming flood insurance: A proposal to improve availability and transparency’, 93 per cent of Australian households have no flood risk. Of the remainder, only 2 per cent are deemed to be at high and extreme flood risk.
Given the relatively low numbers of dwellings in high risk locations, it will probably come as a surprise to most people that by 2006 only 6 per cent of Australian households had flood cover.
There are numerous reasons for this apparent anomaly, some of them historical and others to do with the lack of availability of flood mapping data to accurately price the risk.
Until the Trade Practices Act came into being in 1974, the terms of Australian insurance policies were largely dictated by an insurance cartel called the ‘Tariff’ – a fierce association that dominated underwriting down-under for more than 80 years. Flood cover was never included in Tariff policies.
When the Insurance Contracts Act (1984) came into force, the regulations stipulated wordings for standard home building and contents policies. Flood was included but never defined. In response to the legislation, the Insurance Council of Australia (ICA) came up with a widely adopted exclusion for flood - “the inundation of normally dry land by water escaping from the normal confines of any natural watercourse or lake whether or not altered or modified, or any reservoir, canal or dam.”
Ten years later, the introduction of the General Insurance Code of Practice and plain language wordings brought more losses under the definition of storm.
The problem with not providing domestic flood cover was the reputation risk that followed major events, like the 2007 Hunter and Central Coast floods. As such disasters have proven time and again, the majority of people don’t read their policy exclusions only to find out when their claim is rejected that their policy didn’t cover flood.
Some insurers chose to make ex-gratia payments in these situations, preferring to cop a loss rather than endure the community and media backlash. Others stood their ground.
In 2008, the tide began to turn in relation to flood, with the ICA striking up an agreement with governments around Australia to obtain access to flood risk data. With the help of Macquarie University’s Risk Frontiers and Willis Re, the National Flood Information Database (NFID) was born. For the first time, insurers could get access to data that would help them to assess flood risks for individual properties (based on the Geocoded National Address File of Australia), set premiums and make insurance more readily available.
Since then, the NFID has continued to expand to include more parts of Australia and the latest flood studies/terrain models as they’ve become available.
Under mounting public and government pressure, in June 2011 the insurance industry also finally agreed on a statutory definition for flood to be included in the Insurance Contracts Act 1984 enabling consumers to make like-for-like comparisons between different policies for the first time.
While a couple of insurers had begun including flood cover in their policy wordings as early as 2008, these two key changes had a phenomenal impact on the industry. In eight short years, the number of households with flood cover went from 6 to 83 per cent – a figure cited recently by the Australian Financial Review.
Governments, too, continue to play a key role in helping protect the community from flood risks both through prudent planning and remedial action, such as the building of levees and culverts to redirect flood waters. For example, the Upper Parramatta River Catchment Trust, whose initiatives have been funded jointly by Local, State and Commonwealth Governments, reduced the number of homes subject to over-floor flooding in its western Sydney catchment area by nearly a third between 1990 and 1999 through various flood remediation projects.
According to a 2014 Brisbane Courier-Mail story, a typical $400,000 homeowner in Roma Queensland could see their insurance premiums drop by 90 per cent or $7000 thanks to the building of flood levees in the town in the wake of the 2011 'Summer of Disaster'.
Suffice to say the insurance industry has taken a massive leap forward in the past six years when it comes to protecting ordinary Australians against their flood risks. This has created a baseline for continual improvement that individual insurers can continue to build upon and refine in coming years.
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