A multi-faceted and co-ordinated approach from industry in addressing underinsurance is called for, recognising there is no single or simple panacea to address the underinsurance problem.
The Report responded to the concerns of many stakeholders about the problems created by underinsurance, particularly in the area of home insurance, and made recommendations to improve guidance and disclosure.
The Report acknowledges the problem of underinsurance is aggravated by two factors.
Firstly, underinsurance associated with natural disasters such as floods and cyclones in high risk areas can be addressed by risk mitigation efforts. That is more can be done to mandate more resilient buildings, avoiding building in high risk areas or only permitting building according to strict building codes. This implicitly recognises that there are risks that if not mitigated, lead to very high insurance costs which exacerbate underinsurance because either insurers will not provide insurance or the costs are so high that people elect not to take out insurance. This becomes more acutely felt by those in high risk areas as insurers are able to better price individual risk characteristics of a property or location and so there is less pooling of the risks across an insurance portfolio.
Secondly, the Report considers that general insurers are contributing to the problem of underinsurance because they are not currently providing sufficient guidance to consumers on the likely replacement value for home building and contents when they buy or renew their insurance. Also, even though general insurers are providing tools and calculators to consumers for home insurance they do not include many factors that can influence the cost of rebuilding a home.
However, will addressing these issues resolve the problem of underinsurance becoming more acute in Australia? We think that what is called for is a multi-faceted and co-ordinated approach from industry in addressing underinsurance, recognising there is no single or simple panacea to address the underinsurance problem.
The Report calls for the general insurance industry to take initiatives to:
- provide enhanced guidance and harness technology to improve consumer understanding and better inform decision making about likely replacement values of insured property, including communicating estimated replacement values of insured property to consumers;
- enhance existing tools and calculators for home insurance that cross-reference to up-to-date building costs and building code changes that may affect the rebuild cost, to provide guidance to consumers on the amount of cover required and the replacement values of insured property;
- improve disclosure in insurance documents, and complete the recent work to improve consumer understanding of the key features and exclusions of home insurance through the key facts sheets for home building insurance introduced in November 2014. It is not clear whether the key facts sheets have achieved this purpose.
The FSI has acknowledged the costs of natural disaster insurance can also be further mitigated by the government by:
- having building flood levies;
- reducing the tax burden on insurance; and contracts
- encouraging comparison websites.
Clearly there is no simple solution or answer and work continues across the insurance industry to find ways to improve the quality of information given to consumers while operating within the constraints of a general advice or no advice models for distribution.
Perhaps, along with other changes proposed for the financial services sector, there will be new opportunities, particularly on a digital front, to engage with consumers to enhance their understanding and help them to better manage their risks by buying insurance.
Insurers and the Government will also no doubt be looking closely at the pilot being undertaken by ASIC at the behest of the Government to develop a comparison website for consumers to be able to compare a range of features of home and building contents insurance offered by insurers. This follows the high price of insurance premiums in North Queensland for home and strata insurance following the floods and cyclonic activity in 2010 and 2011. We would expect that this pilot will form the basis for future work in this area.