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Mitigation: a bridge too far for the Government

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The Federal Government accepts disaster mitigation is the only sustainable way to reduce premiums in catastrophe-prone northern Australia. That’s the good news coming out of its long-awaited response to the region’s insurance pricing issues.

The bad news? Agreeing to the sort of spending levels sought by insurers appears a bridge too far, despite the recent Senate inquiry adding its voice to the clamour.

In 2015 the Productivity Commission recommended increasing federal mitigation funding to $200 million a year while reducing recovery spending. Canberra knocked that idea on the head and has stood firm since.

The Senate inquiry’s call for a rethink prompted a “noted” response and an explanation of other measures under way.

“The Government does not propose to reconsider the Productivity Commission’s recommendation,” the response released in December says. “However, the Government is looking at what more can be done within existing resources.”

Political divides complicate the issue, with state and local governments having responsibility for managing their disaster risks, while the bulk of catastrophe relief funding comes from federal coffers.

New funding arrangements, due to start in July, will see recovery payments made upfront based on estimates, rather than on a cost-reimbursement basis.

The Government proposes that any surplus funds, when upfront payments are higher than actual costs, could be kept by states for future resilience and mitigation projects.

It also says a $75 billion, 10-year national infrastructure plan in the last budget includes natural hazard mitigation projects, and adds to a $26.1 million-per-year contribution to state and territory priorities via a resilience partnership.

The Insurance Council of Australia (ICA) has again pushed for the $200 million spend in its submission to Treasury for the 2018/19 federal budget.

“Notwithstanding budget pressures and debt reduction targets, investing in mitigation must be made a high priority by this Government,” CEO Rob Whelan says.

Still, there is relief that the Government decided against intervening in the northern Australian insurance market to curb premiums, and also ruled out a cyclone mutual or pool.

The Government responded to both the Northern Australia Insurance Premiums Taskforce and the Senate inquiry report, which covered some overlapping matters.

The Senate report – Australia’s General Insurance Industry: Sapping Consumers of the Will to Compare – includes 15 recommendations with a strong focus on transparency, industry accountability and consumer understanding.

The Government agreed with eight recommendations and “noted” six, including the mitigation and disaster funding proposals, as well as matters left for the states.

It rejected a proposal for the Government to develop a comparison website for home and car cover, saying the private sector provides those services and there is no clear evidence of market failure.

On transparency and consumer protections, the Government keeps the pressure on insurers to lift their game even while the industry is pursuing initiatives to improve its performance and address concerns.

The Government has asked Treasury to assess whether legislation should be amended to require insurers to show previous-year premiums on renewal notices and explain rises when requested by a policyholder. Providing component pricing details is also up for consideration.

Treasury is further tasked with consulting industry and consumer groups to look at standardised insurance term definitions and to review key facts sheets.

The Senate inquiry and the Government were persuaded that insurance should be covered by unfair contract term provisions. Proposals on this matter will be released early this year, despite arguments the sector is covered by “utmost good faith” obligations and has more than enough oversight.

While the industry has campaigned against being included in the unfair contract terms provisions, the move is no surprise after it was flagged in a review by government advisory group Consumer Affairs Australia and New Zealand.

ICA says it has been discussing the issue with various parties. It says any changes need examination and consultation so they are not detrimental to customer experiences, competition, product differentiation or pricing.

The Government has also called on ICA to speed its work reforming the industry’s code of practice.

The response to the taskforce and Senate inquiries came just weeks after the Government announced a royal commission into misconduct in the banking, superannuation and financial services industry, which includes insurance.

Outcomes and consultations prompted by recent insurance inquiries will be in progress as the royal commission gets under way. 

The industry, at least, will be well placed to respond to concerns raised over its practices, behaviours or activities, and the royal commission will be able to hone its misconduct focus on areas where scrutiny is needed most.

The royal commission is also beginning its work with the high-risk natural catastrophe season under way. That may well assist in highlighting the fact that mitigation is still a central plank in reducing insurance-related costs and concerns.