Is this the solution for unaffordable flood coverage?

Man holding up an umbrella

MELBOURNE – 12 MARCH 2022– Kanopi CEO Nigel Fellowes-Freeman shares his opinion with Insurance Business Australia on the future of mitigating climate change risks and how technology might be the key to better preparation. 

Sydney Harbour is brown with pollution, algal blooms are appearing on many beaches and in some areas rain is still falling. However, for most of NSW and QLD the long process of flood recovery is underway. Including in Lismore.

“The CBD is all clear. Everyone got in and began cleaning up as soon as those floodwaters dispersed,” said Daniel Berry (pictured below), insurance broker with Dudgeon Berry Insurance Group whose Lismore office was destroyed by the floods.

The Insurance Council of Australia (ICA) expects the catastrophe to be one of Australia’s most expensive. By Friday, the ICA’s damage claims estimate was nearly $2 billion.

However, according to brokers, most businesses impacted by the floods don’t have flood insurance because it is unaffordable. The real economic cost of the flooding likely runs into many billions of dollars.

“So in Lismore itself in the CBD it’s [flood insurance] effectively impossible to get,” said Berry, who spoke to Insurance Business between fielding hundreds of calls from clients hit by the floods.

“It’s [flood insurance] just totally unaffordable. No-one can afford that. It’s just pointless,” he said.

“For example, for a business unit in the CBD their premiums might be $2,500 and then if they want flood cover they’re looking at $100,000 a year for flood cover,” said Berry.

However, he said many of his residential customers do have flood coverage for their houses, but more and more are opting not to pay for it.

“There’s a lot of people that just can’t afford it. So they’ve opted for a policy without flood cover and now they’re left stranded,” he said.

In response to this unaffordability some politicians would like to see the government’s cyclone reinsurance scheme for northern Australia expanded to include floods.

Berry said over the last week he hasn’t stopped thinking about possible solutions to this flooding and insurance dilemma. 

“I just feel so horrible for some of our clients. They’ve lost millions of dollars and they’re just left totally exposed because there’s no ability to cover it,” he said.

One idea, he said, is offering flood insurance with a very large deductable.

“I started thinking, why don’t insurers offer flood cover with a $100,000 excess on it? So effectively it’s only going to cover these larger events which are really the events that people are looking to cover?” he said.

Berry said many people are able to handle smaller flooding events with mitigation, like moving furniture and valuables up the first floor.

“Typically that’s OK, it’s just this situation where it’s gone above that and everything has been destroyed [that you need insurance coverage],” he said.

Other brokers have pointed to the lack of an adequate government response.

“I think the wider problem is more the government response. It’s five years since the last big one and what’s happened since then? I don’t know,” said Chris Dougherty (pictured top), insurance general manager at Westlawn Insurance Brokers’ head office in Grafton.

He said another problem is housing developments in areas that can be flood impacted.

“Especially new developments. Some people have been approved to build above a certain level and then that’s become insufficient. So there’s a lesson there somewhere!” said Dougherty.

Mitigation is one key. News reports and other commentary suggest that many communities were surprised by the severity and extent of the floods.

“The government must invest in technology to predict and mitigate this damage in the first place,” said Nigel Fellowes-Freeman (pictured immediately above), CEO of the insurtech Kanopi Cover.

“Given the speed in which we need to act, potential cost to taxpayers and the future damage it will prevent, there’s a clear mandate here to have the government directly invest into businesses pioneering new technology in this space,” he said.

On Friday, the ICA reported that insurers had received more than 125,000 claims from the South East QLD and NSW floods. Based on previous flood events, the ICA said the current estimated cost of these claims is $1.89 billion.

The ICA is calling for governments around the country to invest a total of $2 billion over five years in mitigation and other disaster prevention measures.

“This infrastructure and mitigation investment is vitally important to prevent future harm and devastation to these communities, as we know flood events will inevitably repeat,” said ICA CEO Andrew Hall.