A comprehensive review of insurers' response to Australia's largest ever extreme weather event released today has set out seven areas for action by insurers and the Insurance Council of Australia (ICA) to improve responses to future events.
Commissioned by the ICA and undertaken by Deloitte, The New Benchmark for Catastrophe Preparedness in Australia report examined the operations of eight insurers who together received around 99 per cent of all home and contents, motor, and small business claims related to the floods that impacted northern New South Wales and south-east Queensland in February and March 2022, known as Cat 221.
The flood, which was the second largest insured event in the world in 2022, resulted in more than 240,000 claims with a total value of $6 billion, including $3.4 billion in home property claims, $710 million in home contents claims, and $304 million in personal motor claims. An additional 2,200 claims staff were employed by insurers in response to the flood.
Deloitte interviewed more than 80 staff across the eight insurers, reviewed more than 400 documents and significant quantitative data from all eight insurers, consulted more than 50 people impacted by the event including insurance customers and elected and local government representatives, and interviewed numerous stakeholders including regulators, reinsurers, reconstruction authorities, consumer groups, researchers, international experts, and businesses in the supply chain.
Key findings from the report include:
- External factors made responding to Cat 221 particularly challenging, including a historically tight labour market, building materials constraints, the price and availability of new and used cars, and rental vacancy rates.
- The scale of Cat 221 tested claims processes at a scale never before seen and exposed vulnerabilities in insurers' claims and complaint handling responses, particularly in catastrophe planning, resourcing, processes and technology, communications, and governance.
- Improvements have already been made by insurers as a result of lessons learned from Cat 221, but there is more work that can be done to continue to improve customer outcomes.
- Claim closure rates varied considerably across insurers, however speed is not the only measure of insurer performance as other factors impacted closure timeframes, such as exposure to the event, policy definitions, and the mix of claims types.
The report presents seven recommendations for improvement, noting that not all recommendations will apply to all insurers to the same extent (detailed recommendations attached).
- Preparedness - Insurers should improve their catastrophe planning, particularly their preparedness for extreme catastrophes like Cat 221.
- Customer experience - Insurers should improve the customer experience during catastrophes through better communication with policyholders and by delivering a consistent experience through claim handling and complaints.
- Resourcing - Insurers should redesign resourcing capability for catastrophe events, with a particular focus on workforce planning and resourcing and onboarding during catastrophes.
- Operational response - Insurers should assess what operational efficiencies could be delivered in catastrophes through process, technology, and infrastructure investments.
- Governance and transparency - Insurers should improve their ability to capture and leverage data and insights to understand the impact of internal and external factors on performance during catastrophes.
- Coordination with government - More effective coordination between government and the insurance industry is required to provide faster access to government funding, consistent approaches to clean-up and debris removal, and co-incentivise investment in resilience and adaptation measures.
- Code review - The Extraordinary Catastrophe definition in the General Insurance Code of Practice should be reworked as part of the upcoming independent review.
The Insurance Council has accepted all seven recommendations in-principle. The ICA will lead the work to improve coordination with government and will refer the recommendation regarding the Extraordinary Catastrophe definition to the upcoming review of the General Insurance Code of Practice.
An independent review of implementation progress will be undertaken in the second half of 2024.
Comment attributable to Andrew Hall, CEO Insurance Council of Australia:
The number of claims from Cat 221 was more than six times higher than the average received for catastrophes declared since 2016, so it's not surprising that insurers were challenged in their ability to adequately respond to their customers.
However, insurers acknowledge there were failures of systems, processes and resourcing which impacted some customers as they progressed through their claims process, which was the driver behind the industry proactively reviewing its performance through this event.
The industry apologises to those customers for whom claims were not handled to the standard the industry strives to achieve, and we are working hard to better prepare for future extreme events.
The timing of this flood, which followed 12 insurance catastrophes since the Black Summer bushfires as well as the global pandemic, compounded insurers' challenge, yet the industry is on track to finalise every valid claim, rebuild homes and repair communities, and remain prudentially strong.
This was in no small part due to the efforts of the thousands of people working hard in insurers' claims departments, including the additional 2,200 staff employed by insurers to help deal with the surge in claims.
Australia has the conditions to underpin an insurance industry at the global frontier of extreme weather responsiveness.
Repeated exposure to such events, coupled with established disaster institutions and frameworks, means Australian insurers are well placed to show the world how to respond effectively and efficiently to extreme weather events. This will always need to be weighed up against the cost impacts and keeping insurance affordable.
Deloitte's rigorous and thorough report provides a clear roadmap for insurers on ways in which meet this challenge and move forward on areas that have been identified for improvement.
The ICA will conduct a review on progress against the recommendations and report in the second half of 2024.
