Thursday, March 10, 2022

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EAST COAST FLOODING EVENT: Anticipated Impacts for Policyholders & Insurers

On Wednesday, March 9, PM Scott Morrison declared the flooding event wreaking havoc in South East QLD* and NSW a national emergency, prompting Federal intervention. Meanwhile, the Insurance Council of Australia (ICA) had received more than 107,000 claims relating to the event thus far. In NSW a 25% increase in the volume of claims was recorded between March 8-9 alone and an 11% increase in QLD.

How will this event impact policyholders, future insurance coverage, and pricing?

While the situation is still rapidly evolving, based on current information**, we’ve assembled a list of key considerations insurers are likely to face from here, together with expected impacts for policyholders:  

  • Before the East Coast flood event, Honan was optimistic the hard insurance market had peaked, with pricing continuing to plateau following a return to underwriting profitability. This latest flood event will prolong an exit out of the hard market.
  • The costs of the 2010/2011 QLD floods totalled $2.4 billion, however, the 2022 flood could exceed this figure.
  • Underwriters are expected to respond by focussing narrowly on risks sitting within postcodes impacted by this year’s flood and going back to 2011. If they haven’t already, insurers will likely further limit or exclude flood cover.
  • We expect a high volume of non-damage Business Interruption (BI) claims (Prevention of Access, Closure by Public Authority, and exposure to Customers/Suppliers), to contribute significantly to the total volume of claims from this flood event.
  • As detailed below, the way insurers price for this insurance cover is likely to change significantly.


Pricing increases

In the short term, we anticipate underwriting moratoriums to be placed on new business in flood exposed regions. As the situation progresses, insurers will no doubt look to recover these losses in the form of pricing increases, the level of which will vary case-by-case. Insurers will certainly cast a dimmer view on risks in high hazard zones and will begin to limit the amount of flood cover they provide in these areas, either through absolute exclusions or through aggregated limits.When pricing risks, we expect insurers will begin to shift away from traditional models. Rather than applying a rate on the declared value of the premises, insurers will focus on the rate of return based on the required flood limit. For other lines of insurance with little or no exposure to the impact of the floods, changes to pricing, insurance capacity, and deductibles should be less significant.For those clients able to obtain, and who can afford flood cover, our concern is they may be asked to subsidise those who cannot secure insurance, resulting in future premium increases. For those insureds that cannot afford flood cover, this raises questions about whether to leave or remain in flood-prone areas, especially if these events continue to occur.

Policy wordings: flood vs storm

Insurers will also re-examine policy wordings, in particular, the distinction between a storm versus flood. Flood definitions have recently become more prescriptive, however, the definition of a storm and the resultant damage compared to a flood remains an area of conjecture and claims have been accepted or rejected based on this classification.  All eyes will remain fixed on the Insurance Council of Australia’s (ICA’s) interpretation of this situation, particularly whether it is deemed a single event. This decision will impact the application of limits and sub-limits as well as deductibles, policy reinstatements, and reinsurance.

Policy considerations: inflationary pressures & critical reviews with your broker

Ongoing supply chain delays, the inability to access raw materials, and certain tradespeople are all adding inflationary pressures to the cost of insurance claims because the cost to rebuild is often considerably higher than the insured value. It is therefore vital to work with your broker to review policy limits, sub-limits, and indemnity periods to ensure they are appropriate.Having accurate and current valuations of your buildings, plant, equipment, stock and contents will help businesses and homeowners to ensure they’re adequately covered for their repair and/or replacement in the event of a loss. Thus, understanding the costs to replace all critical items of your business versus the original written or purchase value is imperative to avoid the application of any co-insurance clauses by insurers. Any capital expenditures should also be considered when assessing replacement costs of business assets.This situation is constantly evolving and for clients with upcoming renewals, early engagement with your broker has never been more important. Feel free to reach out to your broker to discuss your insurance needs at any time.

Most importantly - stay safe. Our thoughts are with everyone impacted by this devastating event.



*On 10/03/2022, Queensland Premier, Palaszczuk rejected the Prime Minister's move to include QLD in a national emergency declaration.

**Information as of the date of publication (10/03/2022).

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