Want lower insurance prices? Stop building in harm’s way: IAG

To lower home insurance costs, stop building in disaster zones and empower stakeholders with data to assess risk, says Australia’s largest general insurer.

IAG chief executive Nick Hawkins. Picture: Jane Dempster

To lower home insurance costs, stop building in disaster zones and empower stakeholders with data to assess risk.

That is according to a new report commissioned by the country’s largest general insurer, Insurance Australia Group, which makes 10 recommendations to federal, state and local governments for land use planning reform, including establishing clear limits on acceptable natural hazard risks for land use planning.

“Fundamentally, addressing insurance affordability means reducing the risk our communities face,” IAG chief executive Nick Hawkins says in the preface of the report.

Insurance prices are rising at an annual rate of 14.7 per cent, the highest pace in at least two decades, driven by higher reinsurance and natural disaster costs which affect premiums for house, home contents, and motor vehicle insurance.

At the same time, approximately one in every 25 properties across Australia will be at “high risk” of floods, bushfires and coastal hazards that will eventually make them uninsurable, according to the Climate Council.

IAG is calling for a “national approach” to managing natural disasters and says governments are uniquely positioned to ­“encourage and regulate risk-­appropriate building development” and provide for an appropriate emergency services framework, as weather models predict floods are likely to get worse.

“Crucially, recent flood events must lead to a policy response that goes beyond insurance,” Mr Hawkins said in a submission to a parliamentary inquiry into insurers’ response to the 2022 floods on Australia’s east coast – the costliest weather disaster in the country’s history.

“Ultimately, more flood insurance products will not prevent floods from occurring in future. To build the resilience of our communities and reduce exposure to significant flood risk, we require a broader response,” the submission says.

The report comes just over a month after a landmark review of the industry commissioned by the industry lobby group and done by Deloitte found insurers were ­underprepared for the floods that lashed Australia’s east coast last year at a cost of over $7bn.

IAG has accepted all seven recommendations from that review, including better claim handling, clearer communication with customers, and closer collaboration with governments.

The new report, written by advisory firm AECOM, puts the spotlight back on governments. It urges them to incorporate natural disaster and future climate risks into land use planning and calls for the establishment of nationally agreed risk thresholds to determine the types of developments allowed in riskier areas.

IAG is calling for a ‘national approach’ to managing natural disasters. Picture: AFP

“The decisions made today on what we build and where, have a major impact on the future safety and financial security of our communities,” Mr Hawkins says in the report.

The federal government spent $24bn on disaster recovery and relief measures in the 17 years to 2022, while only spending $510m on prevention and disaster resilience, according to the McKell Institute.

But the most effective way to reduce natural disaster risks is planning reform to – in Mr Hawking’s words – “ensure we’re no longer building in harm’s way”.

The other, more costly, options include mitigation strategies – like raising homes above flood plains, building barriers to protect properties from flooding – and planned relocation when risks can’t be reduced.

“If we don’t build in high-risk areas in the first place, then we don’t have to manage the costly consequences of either dealing with that risk or mitigating it over time,” IAG’s manager of land planning hazards Andrew Dyer told The Australian.

Mr Dyer said that said home insurance prices could only come down if building stops in areas that are prone to flooding and other ­natural disasters, and state ­governments optimise the use of key land and property data so that buyers, banks, insurers and ­governments better incorporate disaster risk into their decisions.

The report calls for a guideline on natural hazard risk tolerance, developed jointly by federal agencies and the insurance sector to establish nationally agreed-upon risk thresholds for different zoning types, considering both environmental and socio-economic consequences.

It would inform regional and local government planning processes and ultimately determine the types of development allowed in medium and high-risk areas.

The report acknowledges the enormous challenge will be amplified by “competing priorities including housing affordability, cost of living and legacy decisions” but says doing nothing would be much more costly.

Such mapping could also help government planning agencies develop a legislative framework that enables accelerated approvals for planned relocation, including rezoning and subdivision following a disaster event.

State governments should also create a national guideline for including adaptation planning “pathways” highlighting regional areas where communities could relocate either over time, or after a disaster triggers that relocation.

“If you’re a community at the moment facing extreme risks, and you would like to relocate, there are no guidelines or frameworks in place. There’s nothing in the planning system to support you with fast rezoning for instance,” Mr Dyer said.

Another key recommendation calls for governments to work with the insurance sector to create a national “source of truth” database of natural hazard risks associated with properties. It would include information about past natural disasters, property structure, and compliance with building standards.

That intelligence could then be shared with property buyers looking to understand the risks of a property they’re moving into and with banks so they can “make informed decisions on (banks) risk appetite on their mortgage”, Mr Dyer added.