The underinsurance debate rolls
Insurance & Risk Professional, June 2009
On February 13 Victorian Premier John Brumby announced Justice Bernard Teague would lead a royal commission into the bushfires. “We learned lessons from the Black Friday bushfires of 1939, we learned lessons from Ash Wednesday in 1983 and if there are lessons to be learned from the horrific bushfires that have taken to much from the people of Victoria we want to learn those lessons too,” Mr Brumby said.
The royal commission will prepare an interim report by August 17, ahead of a final report due by July 31 next year. It will consider all aspects of the fires, including the response effort and any steps that can be taken to help avoid a repeat of the disaster.
It has been given a wide brief, so underinsurance and non-insurance appear certain to be among the issues considered by the Commission.
The Insurance Council of Australia (ICA) was quick to raise the issue of underinsurance and non-insurance, moving in early March to highlight the incidence of non-insurance in the Victorian fire-affected areas.
Of 2029 homes totally destroyed, insurers had received just 1468 claims for total loss residential properties.
ICA has suggested householders in all regions of Australia need to take greater responsibility for protecting their assets, citing a warning it released in October suggesting residents prepare for the impending bushfire season.
“As part of this issue, the royal commission needs to consider the issue of non-insurance in the community and those factors that may contribute to non-insurance including the levels of taxation on insurance in Victoria,” it said.
The most obvious factor is the impact of cumulative insurance taxes on the cost of insurance. Affordability was said to be the major deterrent for many residents in the bushfire-affected areas. Even Prime Minister Kevin Rudd said he was surprised by the number of people he had met at relief centres who told him they were not insured.
NIBA has been a vocal critic of high insurance taxes applied to policies in Victoria, New South Wales and Tasmania. GST, stamp duty and the fire services levy push commercial insurance premiums up more than 97% in rural Victoria, with fire service levies alone adding 63% to a commercial insurance premium. NIBA mounts a persuasive argument and it is one that has been readily picked up by the national news media.
The debate over those uninsured people left destitute by the bushfires exercised media commentators, talkback radio and office discussions for several weeks.
The fact that the uninsured could feasibly access more funds than their insured neighbours divided public opinion, with one side calling for compassion and others demanding that insured people share in the massive pool of donated funds.
In mid-March controllers of the Bushfire Appeal Fund announced the distribution of an initial $130 million to people whose homes were destroyed or damaged in the bushfires, ending a period of consternation about how donated funds should best be allocated.
Owners of destroyed homes will get $50,000, comprising a $35,000 rebuilding grant and $15,000 to replace contents. Tenants of rented properties will receive $15,000.
People forced to relocated due to partial destruction of their homes will receive $15,000 for costs associated with repairs and rebuilding.
An additional means-tested grant will be made available to residents with special needs, a catch-all group comprising large families, reduced and low-income households, people with special building needs as well as the uninsured.
Chairman John Landy and his panel appeared to deliver a strategic masterstroke, at once lancing insurance industry concern about the equitable distribution of funds with the package also winning the approval of the general community.
The decision meant insured residents would at least initially be treated in the same way as the uninsured, avoiding ugly debate about the role donated funds might have had in contributing to Australia’s underinsurance burden.
Whether the royal commission will address the links between tax and insurance affordability remains to be seen. But the bushfires and their aftermath have focused the community on the issue, and politicians may at last be persuaded it’s time to reform the inequitable fire services levy and other associated taxes.