October 14, 2022: Rochester inundated

Rochester resident Paul Poort’s life changed irreversibly at 5pm on October 14, 2022. 

At that moment, when flood waters from the swollen Campaspe River breached the floor of his home, he realised there was nothing he could do to stop the water coming in. He had to get out.  

Fast-forward 10 months and Mr Poort — still living in temporary accommodation — was in Rochester to speak at a public hearing arranged by the Legislative Council’s Environment and Planning Committee for its Inquiry into the 2022 Flood Event in Victoria.

The Insurance Council of Australia (ICA) called it “the most devastating flooding event in Victoria’s history” in its 2022-23 Insurance Catastrophe Resilience Report. 

Rochester, with a population of about 3000, was one of the worst-affected communities in that flood. Some 90 per cent of the town was inundated and hundreds were forced to evacuate.

Mr Poort told the Committee he wanted to return home but was worried about getting flood insurance in the future.

"Will there be an embargo on our town for flood cover, and if not, will we be able to afford it?” he asked. "What, if anything, will our governments do to ensure that we are not disadvantaged by this event regarding insurance cover?”

He was right to be concerned.

Insurance premiums soaring 

Home insurance premiums are skyrocketing and Australian households, already straining under cost of living pressures and rising interest rates, are finding it increasingly difficult to afford the home insurance they need to cover the risks of extreme climate events.

The Actuaries Institute has been monitoring home insurance ‘affordability’ for several years amid concerns rising premiums were causing consumers to abandon their cover. 

The Institute’s 2023 update showed a 28 per cent increase in median premiums, with about half that increase attributed to rising climate risks and the costs of reinsuring against them. (Australian insurers protect themselves against excessive losses from extreme weather events by reinsuring ‘natural catastrophe’ risks with global reinsurance corporations.) 

Co-author of the Institute’s 2023 update, Sharanjit Paddam, said in a media release the latest increases — the largest he had seen in two decades — saw 1.24 million (nearly one in eight) Australian households under “extreme affordability stress” and likely to be under- or uninsured as a result. 

Low-income households in flood-prone areas hardest hit

The actuaries found premium increases were spread unevenly, with affordability-stressed households in flood-prone areas the hardest hit. 

Mr Paddam explained the disproportionate impact of the premium hike in a podcast. 

“The problem is that premium increases “won’t affect everyone equally," he said.

"The most vulnerable members of the community will not be able to afford home insurance, and their circumstances will get worse over time.”

Flood is one of the costliest natural perils and flood risks are highly localised. In flood-prone regions, premiums rose by up to 50 per cent and accounted for about half the household’s total premium.

In areas like the Northern Rivers of New South and parts of regional Queensland, Mr Paddam said in the podcast, “we're really seeing high flood risk driving up premiums, but also … lower levels of income compared to the rest of the country. And those two factors are combining to give us this high affordability pressure.”

The actuaries estimated 171,000 Australian households in high-risk, flood-prone locations were faced with unaffordable home insurance premiums to the value of $1.5 billion per annum.  

“The main villain in this story, I'm afraid, is flood.” 

More flooding occurred in Australia in 2022 than in any other year on record; due largely to the unprecedented scale of the east coast floods that ravaged southeast Queensland and the NSW Northern Rivers region in February-March 2022. 

81 per cent of losses uninsured in 2022 east coast flood

The Insurance Council’s 2021-22 Catastrophe Report describes how this “rain bomb”, a catastrophic combination of three separate weather systems, flooded 600 km of Australia’s east coast, over more than 70 local government areas. Twenty-two people lost their lives, and insured losses exceeded $6 billion. 

As residents waded through flooded streets, Queensland University strategy expert Paula Jarzabkowski noted the vital role insurance plays in disaster recovery. 

“Residents and businesses,” Professor Jarzabkowski wrote in The Conversation, “will be turning to insurance as their only hope of recovery …

"Without insurance payouts they will find it hard to recover, causing emotional and economic hardship for them, their communities and the Australian economy.”

In fact, however, most of the losses from the 2022 East coast flood were uninsured. Data released by the Swiss Re Institute in 2023 shows an 81 per cent protection gap for the ‘Lismore’ (East coast) flood, meaning 81 per cent of the losses from the East coast flood were uninsured. 

Five years needed to reduce premiums, reinsurers say

What is needed to bring premiums down? Amid concerns that the recent spate of natural disasters and record-breaking losses would prompt reinsurers to abandon the Australian market, Assistant Treasurer and Minister for Financial Services the Hon Stephen Jones MP met with global reinsurers to discuss what Australia was doing — and ask what they believed was needed — to bring premiums down.

On his return, Mr Jones told The Guardian the reinsurers said Australia needed to take urgent action to reduce Australia’s vulnerability to the climate crisis, telling the Minister “you’ve got five years basically”. 

Five years — for mitigation measures such as planning reforms, levees, resilient infrastructure and buy-back schemes to reduce risks to the point where premiums come down.

In the meantime, what could insurers and the government do to reduce the protection gap?

Swiss Re Institute’s research papers encourage insurance to collaborate to deliver bespoke, need-specific and affordable insurance products, such as parametric solutions, microinsurance, national public-private insurance pools and risk mitigation incentives, identifying instances around the world where they have been effectively adopted. 

In a 2023 research paper on global flood trends, Chandan Banerjee described Australia’s 2022 floods as “the biggest natural catastrophe claims event ever to happen in Australia”, noting “the cost of rebuilding after the floods in February-March 2022 has been higher than expected”.

Pointing to “lessons learned” from Australia’s 2022 floods and other comparable disasters around the world, Dr Banerjee wrote, “most natural catastrophe events contain learnings, requiring the industry to incorporate these in its risk assessment practices”.

“Sometimes, however, more bold changes may be necessary and appropriate too. For instance, the 2022 loss experience from the hailstorms in France and flooding in Australia warrants a reassessment of the respective return period assumptions.”

One year earlier, senior data analyst Lucia Bevere noted the national public-private schemes introduced in “many advanced economies” to close the flood protection gap.

“Many advanced economies also have national property insurance flood programmes, involving the public and private sectors, such as the UK’s Flood Re scheme”, varying greatly in their specifics, Ms Bevere noted.

In both Norway and Spain, purchase of flood insurance was voluntary: in Norway, “private sector insurers are mandated to offer flood insurance “while in Spain, the responsibility lies with the public sector”. 

“In France, by comparison, the purchase of flood insurance, available from the private sector, is mandatory for homeowners. Other countries adopt an approach that lies somewhere between.”

Since the 2022 floods, there having mounting calls from industry experts and consumer advocates for changes to Australia’s insurance market.

Calls for bespoke, affordable products

Standard terms to reduce 'accidental under-insurance'

A coalition of consumer groups including Choice, the Financial Rights Legal Centre and the Financial Counselling Association see room for improvement in the way that products are defined and marketed to reduce the protection gap. 

Financial Rights Legal Centre senior policy and communications officer Julia Davis said home insurance is “a highly complex product”. 

“You could call it a ‘confuse-opoly’.”

With more than 50 home insurance products in the market, she says, “really divergent terms and conditions and a million different definitions and exclusions” consumers find themselves “accidentally uninsured”: they believe they are covered, only to find their claims denied because they have not understood the exclusions or their own obligations under the policy.  

Ms Davis said a standard cover regime would help reduce accidental under-insurance.

Microinsurance for low-income households

Microinsurance — low-cost cover designed specifically for low-income households — is commonly used in developing countries. 

The World Bank promotes the use of microinsurance, issuing guidance for donors designing products, while the global Microinsurance Network's Landscape of Microinsurance reports on 935 products offered by 253 insurance providers in 34 countries in 2023.   

In Australia, one publicly reported example of a microinsurance product was a 2020 pilot scheme offering low-cost home and vehicle insurance to low-income homeowners and renters.

In a joint submission to the federal flood inquiry, Choice, the Financial Rights Legal Centre, WestJustice and the Consumer Action Law Centre suggested microinsurance  “could be a partial solution to the problem of access to insurance for people on low incomes”. 

A premium discount for mitigating flood risks at home

The Australian Competition and Consumer Commission (ACCC) recommended premium discounts for household mitigation efforts in its 2020 report on the Northern Australian Insurance Inquiry. 

Since then, the Actuaries Institute and consumer advocates including Choice and the Financial Rights Legal Centre have recommended to the federal flood inquiry that insurers be required to consider property-level mitigation measures when commencing or renewing a policy and encouraged to commit to multi-year discounted premiums. 

The Assistant Treasurer also lent his support to premium discounts in a speech to an insurance conference in 2023. A published transcript quoted Mr Jones as saying insurers “need to do better to reflect private household mitigation in prices”, suggesting they offer cheaper insurance when, for example, people raise electrical outlets or elevate their house’s floor to protect it from floodwater.

Bundling flood with other risks increases take-up 

In Australia, flood insurance is generally not part of a standard home and contents policy, but may be offered as optional cover, priced separately. 

Financial Counselling Australia’s national coordinator, Peter Gartlan, said a lot of people in the Northern Rivers area were unable to claim for damage to their homes because they had not taken out optional flood cover.

“They might have had building insurance, but they didn't have flood cover, because in certain areas of Australia that is often an optional extra," Mr Gartlan said. "And the reason why it's optional is because of cost.”

Swiss Re Institute has found more flood cover is taken out — and the flood protection gap reduced — if flood is bundled with other risks.

As data analyst Ms Bevere wrote in 2022: “Take up rates for flood insurance that is bundled together with other covers are typically higher.” 

Bundling flood with other covers, she wrote, “accounts for relatively higher penetration rates in Spain, where bundled products are provided by the public sector, and in France where insurance cover is mandatory and bundled products are offered by the private sector”.

Parametric insurance can fill gaps in indemnity cover

Swiss Re also encouraged insurers to look beyond traditional indemnity flood cover, to consider a broader range of solutions, including parametric reinsurance, micro-insurance and insurance-linked securities.

Unlike indemnity home insurance (a broad-spectrum policy covering multiple risks), parametric cover is used to protect against a single, substantial risk. It provides a pre-determined payout if the trigger (an agreed parameter, such as windspeed or flood height) occurs.

The claim is paid once the trigger event is confirmed, avoiding the effort and delay involved in assessing and processing claims under indemnity policies.

Parametric insurance has been used overseas for many years to fill gaps in the indemnity insurance market, proving especially useful in covering the costs of high-risk, high-impact events, such as floods and storm surges.  

A consortium of private, public and not-for-profit organisations is providing parametric cover to 780,000 households on New York’s floodplain for storm surge damage. China reportedly also has parametric solutions for flooding, using rainfall data and water levels as triggers. Mexico and India use parametric insurance against heavy rainfall to cover expenses such as food, medicine and urgent infrastructure repairs not included in indemnity policies.

In Australia, Redicova is one of the few insurers to offer a parametric product. Redicova general manager Karen Hardy developed parametric cover to provide cyclone-affected policyholders in northern Australia with the ready cash needed to start the recovery process. 

“The true benefit of the parametric product is that it is instant … We can pay people within three business days of receiving their claim," Ms Hardy said.

​Technology has made a significant difference. “We’ve got pinpoint accuracy,” she said.

Geocoding, satellites, sensors and modelling provide detailed, property-specific data. If a cyclone makes landfall, “we know within five metres if those winds have actually hit that geocoded location".

“Parametrics is never going to replace the indemnity insurance that we’re used to in Australia,” Ms Hardy said, but it assures the immediate release of much-needed funds.

Calls for government intervention 

Actuaries call for urgent action to relieve premium stress

In a 2022 paper canvassing affordability issues, the Actuaries Institute asked: “Is it fair to charge premiums that reflect the full expected impact of natural disasters to only those that are exposed to those disasters, or is it fair to share the cost of natural disasters impacting a smaller number of homes across the population, for example through cross-subsidies of premiums between higher and lower risk homes?”

One year later, presenting options to fund flood costs, the Institute recommended urgent action in the short term — cost relief (tax reform) and targeted support such as insurance subsidies — to alleviate the position of households facing extreme insurance stress. 

It has also recommended a re/insurance pool, as a transitional measure, so that the risks and costs of floods (and other hazards) can be shared, to ease the burden on highest-risk households and support a long-term risk reduction process.

'We should think of insurance as an essential service'

The Financial Rights Legal Centre's Ms Davis said Australia has “a pretty ‘pure market’ approach to home insurance".

"Either you can afford to buy insurance from the private market, or you can’t," Ms Davis said. "There’s no real safety net; there’s no insurer of last resort."

In a country such as Australia, “where there’s a lot of climate risk, maybe we shouldn’t think of insurance as a luxury, but as an essential service”. 

Ms Davis said Australia had found ways “to maintain the private market” in other subsidised schemes. “We subsidise health insurance and workers’ compensation … and third party insurance is mandated.” 

She said she saw subsidies as a transition mechanism, “to support vulnerable people” while climate risks are being mitigated through schemes such as retrofitting homes and building resilient infrastructure. 

Choice, the Financial Rights Legal Centre, WestJustice and the Consumer Action Law Centre have recommended trialling “targeted direct subsidies” for low-income households in communities where insurance is unaffordable, in a joint submission to the federal flood inquiry.  

'A vicious cycle' of underinsurance

Prof Jarzabkowski, of the University of Queensland Business School, states on her website that she believes “traditional insurance models are under threat”.

In Disaster Insurance Reimagined, which she co-authored, she asked: “How relevant does the global insurance industry want to be in a world of increasing catastrophic disasters?” 

The industry, she warned, “will fall short of its role of providing the safety net that is so fundamental to the working and prosperity of modern societies” if it “continues to retreat from extreme disaster through high pricing and withdrawal, while the risk of that disaster continues to grow”. 

Writing in The Conversation in the wake of the 2022 floods, Prof Jarzabkowski said she believed Australia was in a “vicious cycle” in which “each disaster increases underinsurance”.

“The more it happens, the more underinsurance grows.” 

Protection gap expert recommends national scheme 

Prof Jarzabkowski is an expert on the various types of ‘protection gap entities’, such as New Zealand’s Earthquake Commission, now widely used in advanced economies around the world to narrow the protection gap by spreading the risks of extreme weather events in a national scheme.

She has recommended the Australian Government establish a government-owned insurance or reinsurance pool, in which “everyone buys insurance at a flat rate against all types of disasters” and insurers pass on their risks to the state-owned pool. 

She envisages the pool is then well-placed to develop a comprehensive database, and ensure risk reduction measures are also taken.  

“Setting up a risk pool without taking steps to mitigate the underlying risk would simply mask, or even exacerbate, the problem”, she wrote. “Risk pools have to include mechanisms that tie insurability to long-term risk reduction through mitigation”.

January 8, 2024: Rochester floods again

On Monday, January 8, 2024 — 15 months after the 2022 flood, and with many Rochester residents still in recovery mode — Emergency Services Victoria (ESV) issued a severe weather warning for heavy, locally intense rainfall across northern and eastern Victoria. 

ESV’s Facebook page records an evacuation order at 5:25pm the same day. By first light on Tuesday, January 9, residents were being told it was already too late to leave. The Campaspe River peaked at 11am that day, about a metre short of the 2022 flood level. Residents had to wait another three days before they could return home.

There are no government-led schemes to underwrite or spread the cost of flood cover (though there is a government-backed reinsurance pool for cyclone and terrorism events).

It is up to individual households to seek out the cover they need in the marketplace.

Two parliamentary inquiries are considering the insurance industry’s response to the floods. The Victorian Flood Inquiry is due to report by June 30. The House of Representatives Estimates Committee’s inquiry into the insurance industry’s response to the 2022 floods, still accepting submissions, is also due to report this year.

The Insurance Council of Australia was contacted, but did not respond by the deadline.