The Australian Reinsurance Pool Corporation’s (ARPC) role should be extended to natural disasters and broker conflicted remuneration should be banned as part of measures to address an insurance “national crisis”, a small business ombudsman inquiry has recommended.

The inquiry report makes 15 recommendations to address what it describes as widespread market failure in regards to the availability and affordability of essential small business insurance products.

“We are in the grip of a national crisis that is killing small business,” Australian Small Business and Family Enterprise Ombudsman Kate Carnell said today.

“As a result, far too many Australian small businesses are on the brink of collapse because they cannot secure a range of insurance products necessary for their operation.”

The report says the ARPC was established after the September 11 2001 attacks in the US, which led to insurance market changes and a risk that individual businesses could not mitigate.

“These conditions are being recreated for small businesses nationwide as they and insurers grapple with the consequences of climate change,” the report says.

Expanding the ARPC’s role to provide reinsurance for all natural disasters for commercial property insurance would increase options for insurers, lower premiums and improve resilience, it says.

The inquiry, announced in July, received more than 800 responses to a survey and more than 20 submissions.

Small businesses reported uncertainty over how much of a broker’s income came from insurer commissions, with some being “shocked at discovering” their broker had received conflicted remuneration.

The report proposes conflicted remuneration should be banned with a phased transition period, while noting a government review is due to take place in 2022 in response to a Hayne royal commission recommendation.

“Given the importance of brokers to small business’ access to insurance, the conflicts involved, and the existing confusion over how brokers are paid, conflicted remuneration needs to be urgently addressed,” it says.

Other recommendations call for statutory caps on liability for personal injury and the introduction of a no-fault National Injury Insurance Scheme, reforming fault-based arrangements that are leaving insurers and small businesses facing “uncontrollable risks”.

“Public liability insurance has become almost impossible for small businesses to obtain, particularly those that offer recreational activities such as caravan parks, quad bike tours or jet boating to name a few,” Ms Carnell said.

The inquiry proposes that the Australian Financial Complaints Authority’s remit be extended so it can cover more small businesses and adjudicate on disputes around products such as public liability and industrial special risks, and calls for industry codes of practices to be mandatory.

Insurance product documentation should set out the most common mitigations businesses can make to reduce premiums and ensure coverage, clearly list exclusions, set out common reasons why claims are denied, use standard definitions and, in the case of foreign insurers, be written in Australian legal terminology, the inquiry says.

The Insurance Council of Australia says the report identifies many important issues and recommends measures which are to be welcomed as part of the public policy debate.

The issue of pool cover for natural disasters has been examined by the Australian Competition and Consumer Commission through its inquiry into Northern Australia insurance, with a report delivered to the Federal Government at the end of last month yet to be publicly released.

“This is a very far reaching issue which has been looked at closely several times, with no effective solution identified in the short term,” a spokeswoman told insuranceNEWS.com.au. “We look forward to the ACCC’s final report from its three-year inquiry.”

National Insurance Brokers Association (NIBA) CEO Dallas Booth says the report reflects the current hard market and wider community discussions over challenging areas, but broker commissions are not the problem and there are clear obligations on them to avoid conflicts of interest.

“Brokers are working very hard to get cost-effective cover for their clients,” he said. “We have not seen evidence of broker remuneration causing client detriment. If there is evidence of that, we are keen to see it, and we will identify the root cause and find ways to deal with it.”

The Caravan Industry Association of Australia says many of its members are “against the ropes” following the bushfire season and COVID-19 travel restrictions and backs the proposed ARPC reforms and public liability cap.

“The ombudsman’s acknowledgment of market failure and the need to provide certainty to small business operators is a welcomed and accurate summary of the current insurance sector,” CEO Stuart Lamont said.

The report is available here.