The parliamentary inquiry into the record 2022 floods has called for insurers and brokers to provide clear guidance to SMEs on policy averaging, and has suggested the federal government consider banning the practice for small businesses.

Under the arrangements, policyholders that have underinsured an asset by a certain percentage will have their payouts reduced by a proportionate amount if they make a claim.

“This incentivises businesses to regularly update rebuild cost valuations on their insured assets, but potentially exposes businesses to unexpected underinsurance, especially if it coincides with high inflation in the construction sector,” the inquiry report says.

“In practice, it appears averaging clauses have mostly disappeared in home and contents policies in Australia but remain in some small and medium-sized business insurance products.”

The inquiry committee heard SMEs can be left unknowingly underinsured because insurers have inadequately communicated about averaging provisions.

Laws around averaging are set out in the Insurance Contracts Act.

The report on insurers’ handling of claims from the 2022 floods makes 86 recommendations, including on expert reports and claims updates and communication.  

It recommends a single point of contact for claims and that insurers contact customers within five business days of the insurer becoming aware of a material change in the expected timing of any previous guidance.

It proposes insurers provide policyholders with access to real-time information about their claim’s progress and key documentation, which could be through a mobile application or other platform.

Some recommendations are directed at the ongoing general insurance code of practice review, and the report also calls for greater Australian Securities and Investments Commission oversight.

Recommendations also propose government action to improve mitigation, long-term resilience and insurance affordability.

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