Underinsurance in Australia

As insurers are inundated with an estimated $1.77 billion in claims relating to the East Coast flood event, the issue of underinsurance is once again emerging.

By mid-March claims relating to the floods that devastated South-East Queensland, the NSW Northern Rivers region and western Sydney, surpassed 118,000. The bulk of the claims were related to property (81%) and motor vehicles (16%).

However, some people have been unable to afford the cost of adequate insurance or have been left uninsurable by previous flooding events.The people affected in this way is likely to increase because of this latest event.

Even those who are insured for market value of their home may find it’s not enough to finance a rebuild. Costs often increase after a natural disaster because of the need to meet current building codes and higher demand for tradespeople and building supplies.

According to the Australian Bureau of Statistics, input costs to housing construction increased by 12% over the past 12 months, with strong demand for building materials the main contributor.

And the Housing Industry Association reported that the availability of all skilled building trades declined further in the most recent quarter. Trades such as bricklaying, carpentry, joinery, roofing, and general building trades reporting the most severe shortages on record.

Policyholders can also get caught short because they’ve underestimated their insurance to lower their premium. They may have carried out renovations to their house and failed to adjust their cover to reflect the increased value at renewal time.

Or they can end up out of pocket if their home and contents insurance doesn’t include temporary accommodation, the cost of demolition and debris removal, and drawing up and lodging plans with local council; and sometimes people exacerbate the financial strain by accepting a cash settlement from their insurer.

Because of the issue of underinsurance some institutions provide policyholders with a safety net. This may add up to 30% to your sum insured in the event of a total loss.

The bigger issue is how the growing problem of underinsurance impacts the community at large. When individuals are uninsured or underinsured the shortfall is often covered by taxpayers. With Australia one of the countries most exposed to extreme weather events, experts are looking towards solutions that reduce the risk of damage to properties and subsidise insurance for those who remain at risk.

The Australian government is taking steps towards a solution that has been adopted by European countries including Spain, France, and Switzerland. It involves providing an insurance or reinsurance pool that reduces premiums and ideally provides cover for 85-100% of households. The private insurer then passes on the risk to the state-owned protection gap entity, which uses pooled premiums to ensure everyone is covered for the specific disaster.

In Australia such a reinsurance pool for cyclones in Northern Australia is set to commence on July 1. However, it doesn’t have widespread cover or consider how to reduce disaster risk so that rebuilding occurs in a disaster-resilient way.