Federal Treasury has proposed restricting the standard cover regime to home building insurance only and mandating that insurers offer a baseline level of policyholder protection. 

A consultation paper says consumer and industry groups have indicated the current regime is not fit for purpose given the ease with which non-standard policies can be offered and has put forward three reform options. 

The options include repealing the standard cover regime, offering a baseline level for home building only, and offering different tiers, such as gold, silver and bronze level covers. 

For option 2 to be effective the baseline level of cover would need to reflect a level of protection that consumers can expect to receive while being affordable, but flood risk represents a complication, the paper says. 

“To ensure that the baseline product is affordable across Australia, the Government could mandate that insurers offer flood coverage on an opt out basis as part of the base product. Alternatively, the opt out could be broader and exclude all natural water-related damage,” it suggests. 

In targeted consultations to date the “vast majority” of concerns around standard cover relate to home building insurance rather than motor vehicle, personal accident, consumer credit or travel. 

“Given this, it is proposed to no longer apply the standard cover regime to the other types of insurance, however, feedback will be sought through this process on the necessity of retaining the standard cover regime for these products,” it says. 

Issues with the tiered-coverage option include ensuring consumers understand the different levels, while experience in private health insurance, where mandatory vertical differentiation was adopted in 2019, has shown that problems under that model can still persist. 

The consultation paper also proposes extending standardised natural hazard terms beyond flood to include fire, storm and stormwater/rainwater run-off. 

Treasury notes that the Insurance Council of Australia has announced work to develop a standard definition of “wear and tear” following problems identified by the General Insurance Code Governance Committee and an Australian Securities and Investments Commission review. 

“This work is being conducted independently of Treasury’s work on standard cover and definitions,” the paper says. 

A consumer groups submission to the current parliamentary committee inquiry into insurers’ responses to the 2022 floods has called for a “genuine standard cover regime” that includes a minimum set of basic defaults. 

The submission recommends a set of standard definitions for every inclusion, exclusion and commonly used term related to natural hazards, a limited number of clearly defined levels of cover above the default standard on which insures can compete, and an ability to cover specific risks in addition to ensure unique individual risks are insurable. 

Treasury consultation paper submissions are due by April 4. It’s then intended that industry and consumers would collaborate on options refinement, term selection and definitions, with exposure draft legislation to be released where necessary, the paper say. 

The paper is available here.