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Insurers' response to Cyclone Larry
In 2000 the Insurance Disaster Response Organisation (IDRO) was set up
to coordinate the insurance industry response to disasters. It aims to
enable the industry to work with government and emergency services to
provide the best possible response and recovery service for the
consumers who have been affected by a disaster.31
After Cyclone Larry struck, insurers set up 24-hour call centres to deal
with initial inquiries and provide advice. More than 100 loss adjusters
and claims personnel were sent to the disaster-affected area immediately
after the disaster.32
The insurers surveyed in August 2006 indicated that they were
ressponding in a variety of ways to increase the amount payable under
the policy:
- One insurer allowed for the sum insured to be increased at any time,
in particular after a cyclone warning.
- Another insurer has applied pro rata indexation since the last renewal
in order to minimise the extent of underinsurance to compensate for
the substantial gap in increased costs between the date the insurance
is taken out and the date of the claim.
- Some insurers were more lenient in relation to accomodation periods
with one insurer extending the period from 12 to 24 months.
- Insurers made ex gratia payments.
- One insurer has not pursued policy exclusions such as poor
maintenance, structural defects, non-compliance with building codes,
pre-existing damage, termite damage and failure to repair fences.
We note that a flexible interpretation of their policy has had positive
outcomes for those insureds. However, it does not address the cause of
the problem, namely underinsurance as a result of escalating building
costs and costs of compliance with the building code.
Natural disasters such as Cyclone Larry also reveal a level of noninsurance,
where consumers choose to take on the risk themselves.
Whilst the level of non-insurance is not an issue dealt with in this report
such a decision effectively results in financial support from the
government and community.
Lessons to be learned from Cyclone Larry
Our August 2006 survey of insurers highlighted further lessons that can be
learned since the release of the 2005 report and in light of Cyclone Larry-
particularly about 'inadvertent underinsurance' resulting from a disaster
(i.e. where underinsurance is not apparent when a policy is taken out):
- No two disasters are the same. With Cyclone Larry, conditions such
as location and the continued bad weather after the cyclone
exacerbated the level of underinsurance. Overall, insurers who
responded to the August 2006 survey estimated that building costs
increased by at least 50% immediately after the disaster.
- Estimates are that at least 10% of the 8,000 houses damaged were in
a poor state of repair-and most of these were rental properties.33
Failure to properly maintain the home can result in significantly more
damage.
- Deterioration of fasteners, sheeting and metal frames due to rust and
rotted timber compromised the structural performance of the home
and contributed to further damage from Cyclone Larry. Undetected
damage from previous cyclones and incomplete repair after previous
events or during renovations also contributed to further damage.34
- The impact of demand surges cannot be adequately reflected in
policies with a fixed sum insured. While some insurers allowed for an
adjustment of the sum insured during the term of the policy to bring
the sum insured in line with rising costs, building cost surges of at
least 50% cannot be incorporated into these policies.
Building code requirements
Responses from three insurers surveyed indicated that building code
requirements relating to cyclone standards may have contributed to the
surge in building costs adding $15,000-$25,000 to reinstatement costs.
One insurer surveyed has changed its pricing structure in cyclone prone
areas. Two insurers surveyed have embarked on an educational campaign
about underinsurance in such areas.
One insurer commented on the need to incorporate increased code
compliance costs into its comprehensive calculator but also recognised
the difficulty of doing so. One provider of building cost information now
provides in its estimate of building costs building code requirements and
other building requirements such as BASIX in New South Wales.
31 http://www·idro·com·au/about/default·asp.
32 The Insurance Council of Australia Annual Review 'Highlights 2005/2006', May
2006, p. 14.
33 Information provided by the Cyclone Larry Taskforce, 26 October 2006.
34 Tropical Cyclone Larry CTS technical report TR51, September 2006, p. 74.
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