A weather event now known as Cat 221 tested the insurance system last year like never before, and a new report now calls for insurers to improve their practices to stop the outflow of customers from the industry.

The report by Deloitte, commissioned by the Insurance Council of Australia, focuses on poor responses from insurers on how they handled claims, rather than any suggestion of how climate impacts could be mitigated.

For instance, outside the scope of the report were issues such as the level of insurance protection, land use planning, building codes and requirements, preventive resilience and mitigation measures, product design, policy terms nor a range of issues around the management of policies held by customers nor how these were structured or implemented.

Instead, it elicited an apology from chief executive Andrew Hall and a tale of woe of how big an impact the claims had on the industry: $3.4 billion in home property damage claims, $710 million in home content claims and $304 million in personal motor claims, adding up to the second-largest event in insured claims in the world in 2022.

Hall focused on how his organisation could improve services to attract more customers back to insurance.

“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,” he said.

The Committee for Sydney recently found that insurers were withdrawing from the market as taxpayers pick up the tab for climate disasters.

Cat 221, which describes the floods that impacted northern New South Wales and south-east Queensland in February and March 2022, prompted to commission to undertake a comprehensive review into insurers’ response to Australia’s largest-ever extreme weather event.

“However, insurers acknowledge there were failures of systems, processes and resourcing which impacted some customers as they progressed through their claims process,” Hall said.

The new benchmark for catastrophe preparedness in Australia report said it was a tough environment at the time:

External circumstances meant that responding to CAT 221 was always going to be challenging. At the time of CAT 221, the world was also grappling with the ongoing economic and social consequences of the COVID-19 pandemic, and Russia’s invasion of Ukraine had exacerbated global economic vulnerabilities. Border closures, supply chain shortages, labour market disruptions, high demands on the construction industry, rising interest rates (during the recovery phase) and a multitude of other economic challenges were impacting the Australian economy and insurers’ ability to respond to CAT221. The presence of these factors affected the industry’s response but do not explain all aspects of insurer performance.

The report by ICA includes data from customers, 400 documents and 80 staff members across the eight insurers who covered 99 per cent of all claims relating to the Cat 221 event.

According to the report, the said extreme weather conditions of the event had put insurers’ claims and complaint process to the test. The test exposed a number of vulnerabilities in catastrophe planning, resourcing, processes and technology, communications, and governance.

Insurers must improve on the below seven aspects, said the report:

  • preparedness for future extreme catastrophes
  • customer experience during weather events
  • resourcing capability to deal with catastrophes
  • the efficiency of operational response
  • governance and transparency of data and insights
  • more coordination with the government
  • review of the definition of an Extraordinary Catastrophe in the code of practice

The ICA has accepted all seven recommendations and will examine its code of practice in an upcoming review. It has also committed to an independent review of the implementation progress in the second half of 2024.

“Australia has the conditions to underpin an insurance industry at the global frontier of extreme weather responsiveness,” Hall said.

“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.”

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