Flood failure to future fairness – Parliamentary inquiry into the 2022 flood response

Why the market for flood insurance is breaking down for the riskiest properties

The inquiry's final report highlights critical findings: the escalating costs of flood insurance, the declining accessibility of opt-out policies, and the overall reduction in profitability of home insurance products.

Insurers are reducing their exposure to flood risk

In the aftermath of the 2022 floods, insurers are reassessing their flood risk exposure, affecting the availability and affordability of flood coverage. Many are reducing coverage limits or raising premiums to reflect future flood risks. Some insurers are also increasing excesses or cutting back on certain products. The ICA’s NFID, along with local councils' efforts to enhance flood mapping, has improved risk assessment, allowing insurers to evaluate flood risks at the postcode level and, for some, at the property level. These developments are influencing insurers' risk modelling and pricing strategies.

Flood insurance is becoming increasingly unaffordable for properties with the highest risk

Flood insurance is increasingly unaffordable, particularly for the 4.4% of properties at highest risk, with 15% of households experiencing affordability stress, a significant rise from previous years. Insurers are collecting more granular data, leading to lower premiums for lower-risk properties, while higher-risk policyholders face steep premium increases or lack coverage altogether.

The Actuaries Institute reports that the number of households in insurance affordability stress has grown dramatically, now affecting 1.6 million households in 2024. As the insurance market hardens, many flood-prone areas are seeing a reduction in available coverage, leaving residents vulnerable and struggling to afford premiums.

“Opt-out” insurance is becoming more difficult to obtain

"Opt-out" flood insurance is becoming harder to find. After the 2011 floods in South-East Queensland, some insurers shifted to an opt-out model, allowing low to moderate-risk households to secure affordable coverage. However, many insurers are now reverting to mandatory flood coverage to reduce disputes over water damage claims. For instance, major insurers like RACQ and Allianz now include flood cover as standard in their home insurance policies. While a few companies still offer opt-out options, these are increasingly rare, raising concerns that 200,000 plus properties at 1-in-20 year risk or higher, as identified on the NFID, would be unable to afford insurance.

Reduced profitability of home insurance products

The profitability of home insurance products is on the decline, raising concerns about long-term sustainability. For insurers, profitability hinges on premiums exceeding claims, underwriting expenses, and reinsurance costs. Despite a collective profit of $4.5 billion for the 2022-23 financial year, questions arose over how insurers could profit amid $7.7 billion in unexpected flood-related losses. The Insurance Council of Australia (ICA) attributed profits to strong investment returns and recovering commercial insurance, which offset home insurance losses. However, the Australian Prudential Regulation Authority (APRA) noted rising claims costs, indicating potential sustainability issues for home insurance, as profitability has dropped significantly since FY20, with a combined operating ratio above 100 signalling ongoing losses.

The impact of increasing flood risk on reinsurance

The rising flood risk in Australia is significantly impacting reinsurance costs, driving up premiums for insurers. Following the major floods of 2022, reinsurers reassessed their strategies, no longer viewing Australia as a hedge against global losses, particularly as climate change intensifies extreme weather events. Insurers reported reinsurance costs increasing by 20-30%, largely due to rising claim costs and inflation, as well as the high value of assets in flood-prone areas. While Australia remains attractive to some reinsurers, increased costs are aligning with global standards, requiring insurers to retain more risk. Reinsurers are also considering isolating specific perils in their coverage as climate-related risks grow more pronounced.

Recommendations

The inquiry's final report emphasises the need for substantial reforms in the flood insurance sector, primarily through an overhaul of the code of practice and enhanced oversight by the Australian Securities and Investments Commission (ASIC). It recommends strengthening the code to include standardised key terms and improving ASIC's data-gathering and enforcement capabilities to increase transparency and accountability among insurers.

Among the 86 recommendations, key proposals include making the code enforceable in consumer contracts and extending temporary accommodation benefits until claims are fully resolved. The inquiry advocates for a flexible approach to property rebuilds, allowing for improvements in resilience rather than strict like-for-like replacements. It also highlights the necessity of clearer definitions of water damage in the Insurance Contracts Act and suggests creating an independent expert panel to assist policyholders.

The report acknowledges that the current reliance on granular data undermines risk pooling, particularly for high-risk properties, and calls for government intervention to improve the affordability of flood insurance. This includes exploring government-supported reinsurance options and regulatory measures to discourage high-risk developments. The committee stresses that better claims management and long-term strategies are essential for protecting vulnerable communities from future flood risks.

House of Representatives & Standing Committee on Economics. (2024). Flood failure to future fairness: Report on the inquiry into insurers’ responses to 2022 major floods claims. Parliament of Australia. Commonwealth of Australia. https://parlinfo.aph.gov.au/parlInfo/download/committees/reportrep/RB000297/toc_pdf/Floodfailuretofuturefairness.pdf