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Focus: Government response to natural disaster relief and insurance arrangements

9 March 2011

In brief: In recent days the Federal Government has announced a number of initiatives in response to the natural disasters experienced early this year such as the Queensland floods and Cyclone Yasi. Partner Dean Carrigan (view CV), Senior Associate Amanda Taylor and Lawyer Hashini Panditharatne report.

How does it affect you?

  • The Government has recently announced amendments to the way Federal Government funding will be allocated in response to natural disasters which could impact on how state assets are insured in the future.
  • A separate review of natural disaster insurance announced by the Federal Government in the same week will also consider whether the existing Commonwealth and state arrangements for dealing with natural disaster recovery should be supplemented by the establishment of a national disaster fund to support the rebuilding of public infrastructure in the aftermath of events such as the recent floods.
  • At this stage it is not clear how the review of natural disaster insurance will interact with the Federal Government's recent announcement in respect of its funding for natural disasters.  While the new arrangements will not apply to the recent Queensland floods and Cyclone Yasi, any changes implemented as a result of the review could have a big impact in the case of future catastrophes and how the replacement and restoration costs are shared by governments, insurers and taxpayers.
  • At the same time the Government is consulting with the insurance industry to agree on a standard definition of 'flood' and a plain English summary for consumers.

Reform of natural disaster relief and recovery arrangements

On 3 March 2011, the Federal Government announced that it will rewrite the terms of its 30-year-old natural disaster relief and recovery arrangements (the NDRRA) with the effect that the amount of funding states and territories will be entitled to following a natural disaster will be contingent on their own insurance arrangements.  Under the new arrangements, states and territories will be required to insure their assets or put in place alternative arrangements. 

The Government is of the view that the changes will help ensure all state and territory governments have adequate capital or insurance to fund the replacement and restoration of infrastructure following a catastrophe.

The decision to rewrite the terms of the NDRRA was followed the next day by the announcement that the Government will be conducting a review into disaster insurance in Australia.  This review, coupled with the Government's ongoing work with the Insurance Council of Australia to develop a mandatory definition of the term 'flood' to be incorporated into the Insurance Contracts Act 1984 (Cth) (the ICA), is a significant step that has the potential to usher in powerful new changes to the flood insurance landscape. 

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National disaster insurance review

On 4 March 2011, Assistant Treasurer Bill Shorten announced a review into disaster insurance in Australia.  The review will concentrate on insurance arrangements for individuals and businesses for damages and loss associated with flood and other natural disasters.  The review's intention is to ensure individuals and communities at risk of extreme weather events are aware of the dangers and are able to obtain appropriate protection both in terms of obtaining insurance and benefiting from mitigation strategies.  The review further aims to ensure that appropriate national measures are in place to foster a more equal sharing of risk and an equitable sharing of the cost of damages and loss resulting from floods and other natural disasters. 

The review will be chaired by a former member of the Australian Prudential Regulation Authority, Mr John Trowbridge, with Mr John Berrill and Mr Jim Minto as members.  This committee will report its findings and recommendations by the end of this year. 

The review will consider a number of issues, including the following:

  • the extent of, and reasons for, non-insurance and underinsurance for flood and other natural disasters in Australia;
  • the ability of private insurance markets to offer adequate and affordable insurance cover for individuals, small businesses and governments for flood and other natural disasters;
  • the need for any further measures to enhance:
    • consumer awareness and understanding of the scope and coverage of available insurance products; and
    • claims management, dispute resolution and consumer assistance and advocacy services;
  • the effect, or likely effect, of the recent floods and other natural disasters on future insurance premiums in respect of such cover;
  • whether there is a case for subsidising insurance premiums for individuals and small businesses in the areas of highest risk;
  • whether there is a role for the Commonwealth Government in providing disaster insurance or reinsurance to the private sector, through mechanisms such as a national disaster insurance program, and how this may impact on the private insurance market; and
  • the relationship between disaster mitigation measures taken by state and local governments against flood risks, and the impact of such measures, or the lack of them, on the availability and affordability of flood and other disaster insurance.

The review will also consider whether the existing Commonwealth and state arrangements for dealing with natural disaster recovery should be supplemented by the establishment of a national disaster fund to support the rebuilding of public infrastructure in the aftermath of events such as the recent floods. At this stage it is not clear how the review will interact with the Government's recent announcement in respect of the NDRRA outlined above.

The Insurance Council and the National Insurance Brokers Association have both indicated their support for the review and what it aims to achieve. 

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Mandatory definition of 'flood'

In the aftermath of the Queensland floods, the Government has held a series of meetings with the insurance industry to discuss reform of flood-related insurance.

On 18 February 2011, Minister Shorten announced that the Government had reached agreement with the Insurance Council to develop:

  • a mandatory definition of the term 'flood' to be incorporated into the ICA (for reference by insurers that offer flood insurance); and
  • a plain-English, one-page summary statement which will help ensure that consumers are aware of what their insurance policies cover them for. 

The Insurance Council is currently consulting with its members and this process is expected to be followed by consultation by the Government with consumer groups.

A national flood-mapping database has also been discussed by the Government and the insurance industry and the methods of funding the database will form the basis of future talks.

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Conclusion

The changes to the NDRRA, followed by the announcement of the review into disaster insurance in Australia, may have widespread implications for state and territory governments, local and overseas insurers, reinsurers and brokers in terms of the insurance covers required to be put in place to protect state assets.

While the new arrangements will not apply to the recent Queensland floods and Cyclone Yasi, any changes implemented as a result of the review could have a big impact in the case of future catastrophes and how the replacement and restoration costs are shared by governments, insurers and taxpayers. 

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