Cash settlements have become a “problematic norm” in response to home claims following disasters and a suite of reforms is needed, a Financial Counselling Victoria report says.

The report calls for stronger protections to prevent underinsurance, standardisation of terms, more flexibility for building back with greater resilience, and changes to the way cash settlement amounts are determined and explained.

“The prevalence of cash settlements following a disaster is hampering community recovery and leaving households at severe risk of hardship,” Financial Counselling Victoria executive officer Zyl Hovenga-Wauchope said today.

“This report provides strong recommendations to the insurance industry and government on the course of action required to divert households from insecure and uncertain futures.”  

The report says householders may accept cash settlements that are not in their best interests due to frustration over processes and disputes, or they may be forced to accept settlements after being deemed underinsured due to exclusions and the failure of sum-insured policies to accommodate rising building costs.

Underquoted cash settlements are providing insufficient rebuilding funds, if insurers cannot secure trades they cash settle regardless of policyholder wishes, and homeowners are disadvantaged by a significant power imbalance, Financial Counselling Victoria says.

The report – Unsettled: Climate Risk and Cash Settlements in Home Insurance – is based on counsellors’ casework following the October 2022 floods.

Federal flood inquiry chairman Daniel Mulino, MP for the flood-hit Maribyrnong area, said at the launch that the report would be examined by committee members.

“While I can’t speak for the committee, I can say that a number of the recommendations jump out at me as ones that will dovetail very well into our report,” he said.

Dr Mulino says cash settlements can sometimes be appropriate, but often they do not resolve issues for households and raise questions about the transfer of risk from large organisations to vulnerable individuals.

“Our regulatory system does have some guardrails, but I think this report points to the fact we need to think about whether or not those guardrails at the moment are sufficient,” he said.

Other recommendations include having an independent body such as the Australian Financial Complaints Authority or the Australian Securities and Investments Commission involved in obtaining expert reports.

Report author Antonia Settle says issues around cash settlements will probably worsen with rising climate risks and they reflect a wider problem.

“We need to accept more regulation over the insurance sector,” she said. “Insurers are at the coalface of climate risk. Let’s not pretend this is a regular private market. Weather-related risks are no longer amenable to hands-off private coverage and we can see that very clearly in the cost of premiums. This is public policy.”

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