Battlelines are again being drawn over the extension of standard definitions beyond flood and wider reforms, amid the latest consultation on an issue that has previously been kicked down the road.

More natural hazard definitions and a revamped standard cover regime are not a complete solution in making insurance work more effectively, but consumer groups strongly back reforms while insurers are warning of adverse consequences.

The Insurance Council of Australia (ICA) says in a submission to Treasury that more standardisation could limit competition on non-price elements, and cost and administration burdens, particularly for smaller firms, should be considered in the affordability and accessibility context. 

ICA queries suggestions that standardisation will lead to increased comparability, dispute reductions and improved affordability. 

By itself it would be unlikely to lower premiums and “the low to average financial literacy rate in Australia and lack of understanding of key risk drivers may present ongoing challenges to adequate consumer understanding of financial products”, ICA says. 

Financial Rights Legal Centre Senior Policy and Advocacy Officer Drew MacRae says the industry is victim blaming. 

“The insurance sector is the one that has made these products so complex that it is impossible to understand them,” he told insuranceNEWS.com.au. “You wouldn’t need to look at the financial literacy issue if the products were simple.” 

A combined submission from the Financial Rights Legal Centre, Consumer Action Law Centre, Choice, Mortgage Stress Victoria and WEstjustice argues consumers are faced with a “soul-crushing amount of inconsistent and confusing information” that’s counterproductive and leads to poor outcomes at claims time. 

Financial Counselling Victoria backs a Financial Rights Legal Centre report two years ago on the issue, and the group in its submission supports a basic and consistent standard insurance contract, and component pricing that gives a detailed breakdown of factors driving a premium. 

“We note that changes to the standard definitions and cover for insurance will simply ‘tinker on the edges’ of a much larger question – whether property insurance in its current format is fit for purpose and adequately protects the most vulnerable, particularly in the aftermath of a major-loss disaster,” it said. 

Treasury officials appearing before the federal inquiry into insurers’ handling of the 2022 flood catastrophes recently said standardised definitions of natural hazard terms could reduce confusion but won’t solve all coverage and claim issues. 

“Even if you have clearly defined distinctions between what a flood and a flash flood might be, you then need at claims time to distinguish between those, and that can bring cost, delay and so forth,” Treasury Assistant Secretary, Banking, Insurance and Credit Robb Preston said. 

Treasury’s consultation document floats the idea of defining fire, storm, and stormwater and rainwater run-off, adding to the current flood definition. Reform options for the standard cover regime could include narrowing it to home products. 

“There is merit in looking at standardising the definitions of the three perils that we pointed to, but note that I think that there will nevertheless be complexities that exist even if we go down that path,” Mr Preston said. 

ICA says its members hold diverse views on the benefits of greater standardisation and reforms to the standard cover regime, and it expects companies will make separate contributions to the Government’s consultation.  

It says the original intent of the standard cover regime was not to standardise policies, but to bring to a consumer’s attention any exclusions and limitations they might not expect to be in a contract. 

Consumer advocates say the arrangement for bringing those factors to a consumer’s attention involves product disclosure statements that may run to more than 100 pages and that people don’t read. 

Ultimately, consumers don’t understand what is supposed to be in an insurance product in the first place and there needs to be a better understanding of the community expectations of product coverage, Mr MacRae says. 

Reform proposals aimed at helping consumers understand and compare their insurance and gain the cover they expect have been discussed for years but have gone around in circles. 

 A Senate general insurance review in 2017 recommended action, Treasury undertook preliminary consultations in 2019 on standardisation reforms, and the Australian Competition and Consumer Commission’s Northern Australia Insurance Inquiry proposed changes in 2020. 

 The Albanese Government picked up the issue in its October 2022 first budget and the resulting Treasury consultation paper was released last month, with an early April deadline for submissions.

Consumer groups say the review should be placed within the broader context of disclosure failures and the need for other reforms, but it’s time for action. 

“Are we going to be having a Senate inquiry or royal commission every couple of years, and after every disaster, and come up with the same recommendations over and over again?” Mr MacRae said.  

“Don’t put the resources into that; put the resources into actually getting this right, and do it sooner rather than later, otherwise we will be back here again in five years.”