the insurance dilemma for households in high-risk bushfire ......2015/08/18 · and understand the...

The insurance dilemma for households in high-risk bushfire prone areas Briefing paper: Local Recovery Steering Group

First prepared 2 June 2015,

Revised Version 9 updated 20 July 2015

Contents Purpose of report .................................................................................................................................... 2

Executive Summary ................................................................................................................................. 3

Introduction ............................................................................................................................................ 3

The regulatory situation today with bushfire prone properties ......................................................... 4

Concerns of bushfire affected residents ............................................................................................. 8

The BAL/insurance dilemma ............................................................................................................... 8

Problems with BAL Assessment Reports ........................................................................................ 9

Building industry impacts .............................................................................................................. 10

No one-stop shop for insurance consumer/developer information ............................................ 10

Information that does exist .......................................................................................................... 11

Where should information and guidance sit? .............................................................................. 12

Changing business and consumer attitudes is fundamental ........................................................ 14

Insurance calculators – useful or not? .......................................................................................... 14

Messaging to insurance consumers .............................................................................................. 15

Rural Fire Service – Preparedness Education................................................................................ 15

Insurance innovation – the link between premiums and mitigation ............................................ 16

Summary of insurance intricacies ................................................................................................. 17

Productivity Commission Inquiry into natural disaster funding ....................................................... 17

Opportunities/Solutions ................................................................................................................... 19

Recommendations to the Local Recovery Steering Group ................................................................... 22

Local Recovery Steering Group Feedback ............................................................................................. 22

Version control .............................................................................................................................. 24

Appendix 1 – Cordell calculator ............................................................................................................ 25

Appendix 2 – Productivity Commission inquiry into natural disaster funding arrangements .............. 28

BMCC-led Local Recovery June 2015 1

Purpose of report This paper has been prepared on behalf of the Local Community Reference Group (LCRG), which was established in April 2014 to support the October 2013 bushfire recovery efforts in the Blue Mountains. The LCRG formed in accordance with a Memorandum of Understanding (MoU) arrangement between the Ministry of Police and Emergency Services and Blue Mountains City Council for Council-led long-term recovery coordination. This LCRG consists of residents from the bushfire affected areas, several of whom lost their homes. The role of the LCRG is “to be a key conduit for providing feedback and advice on community recovery issues as well as assisting their communities to be aware of and involved in the recovery work being undertaken”.

The LCRG requested the Local Recovery Steering Group (LRSG) in May 2015 consider the establishment of a taskforce to develop a simpler solution than is currently present that would encourage residents to know their BAL rating (Bushfire Attack Level1) and seek appropriate levels of building insurance.

The request stems from the level of under-insurance that bushfire affected residents discovered following the bushfire event. The complexity of knowing how to determine appropriate level of insurance cover required to rebuild to higher building standards in high-risk bushfire prone2 areas, also remains a concern for residents.

The Local Recovery Steering Group at its May 2015 meeting resolved to receive a further report from the Recovery Manager on the recommendation for a taskforce – outlining opportunities, constraints and scope of activities.

1 A means of measuring the severity of a building's potential exposure to ember attack, radiant heat and direct flame contact, using increments of radiant heat expressed in kilowatts per metre squared, which is the basis for establishing the requirements for construction to improve protection of building elements from attack by bush fire. (RFS 2015) 2 Bushfire prone land is an area of land that can support a bush fire or is likely to be subject to bush fire attack. In general, a bush fire prone area is an area mapped for a local government area that identifies the vegetation types and associated buffer zones. Bush fire prone land maps are prepared by local councils and certified by the Commissioner of the NSW Rural Fire Service.


Executive Summary The findings in this report highlight the insurance implications around bushfire prone properties. The issues identified are of prime importance to the Blue Mountains Community as large areas of the city are classed bushfire prone. Unfortunately, there is a high probability that many homes that do not meet current building regulations for bushfire prone areas will be unintentionally under-insured.

The bottom line is that exacerbated stress during recovery and health costs can be avoided, if property owners take responsibility for having adequate insurance, are bushfire prepared and hold a better understanding of the value of the planning regulatory system in saving properties and lives.

The dilemma faced by governments, insurance companies and individuals is that it is extremely complicated for households to receive simple and clear information that informs the level of insurance cover they require. It is even equally, if not more difficult, to encourage high-risk households to know their fire risk, and to inquire about appropriate insurance levels.

The report highlights many shortfalls with insurance arrangements and the complexity of understanding the range of bushfire attack levels (risk exposure) for bushfire prone land.

The report concludes with a set of identified short-term and long-term solutions and proposes a number of recommendations for the Local Recovery Steering Group to consider in moving forward on this dilemma.

Introduction The devastating fires of 17 October 2013 in the Blue Mountains areas of Springwood, Winmalee, Yellow Rock, Mount Victorian, Mount Wilson, Mount Irvine, resulted in the destruction of 197 homes and substantial or partial damage to another 135 privately owned buildings. With the exception of just a few homes, all destroyed homes were in declared bushfire prone areas.

From the outset of the fires, fire-affected households who had total, substantial or partial building losses have been grappling with the cost and complexity of rebuilding in a bushfire prone area. The initial news of the rebuilding situation came as a shock for many. The stress associated with the complexity of rebuilding and the financial hardship from inadequate insurance generated blame and anger and exacerbated mental health and wellbeing issues.

Blue Mountains City Council anticipated the effects of the complex bushfire planning regulatory system on home-owners. It immediately established with the support of two Rural Fire Service offices a building services help desk, hosting public information sessions to assist affected owners with the rebuilding process. The additional support effort was widely recognised and highly praised. To-date the rate of rebuilding is more than what was anticipated. The progress of rebuild of the 197 homes that were totally destroyed, as at 1 June 2015 stands as:

110 new dwelling Development Applications received 99 new dwelling Development applications approved 21 approvals to new residents 81 construction certificates issued


20 Final occupancy certificates DA value for new dwellings - $45,081,238 Average DA estimate for new dwellings - $409,829

The efforts of the Council to alleviate rebuilding impacts on residents went some way to easing the burden of recovery. However, the real work lies with the issue of getting property owners to know and understand the ramifications of their property fire rating level, known as Bushfire Attack Level (BAL), and having appropriate levels of insurance to cover higher building code construction costs where the BAL rating so determines before bushfire strikes.

The regulatory situation today with bushfire prone properties In 2002, new building regulations came into effect to improve the resistance of properties to bush fire attack. The Planning for Bush Fire Protection 2006 sets out the current requirements for development proposals in bushfire prone land.

Typical settlement patterns across the Blue Mountains form along mountainous ridgelines adjoining vast areas of bushland and steep slopes, with many subdivisions formed in the early and mid-1900s. There are many homes that were built before the introduction of the new bushfire building codes and do not comply with the current building standards. Broadly speaking, unless settlement is formed near the Great Western Highway and rail corridor, or commercial business districts, there is a high probability that properties are classed as ‘bushfire prone’. The city of Blue Mountains has 33,250 privately owned properties. Very crude estimates of the proportion of the city’s housing located in areas declared as bushfire prone, is around 90%. Unfortunately, many households are not aware that they live in a bushfire prone area.

A property owner can find out if their land is bushfire prone via two ways. The first method is to pay a fee to Council for a Planning Certificate (sometimes referred to as a S149 certificate). This certificate will state if the property is bushfire prone. The other is to refer to Council’s bushfire prone map. The bushfire prone map is produced by Council every five years or so. Rural Fire Services (RFS) guidelines instruct Councils on how to determine and prepare bushfire prone area maps. Once complete the RFS Commissioner certifies the maps. Example of the bushfire prone land map for the Mount Victoria disaster affected area is as follows (Figure 1).


Figure 1 - Bushfire prone land map - St Georges Parade Mount Victoria

Properties are classed bushfire prone, if any of the orange, yellow or red areas encroach on any part of the property or if they are classified as Category 1 or Category 2.

Some Councils convert this map into a property affected map to simplify information for users. The Blue Mountains City Council’s mapping system uses grey colour to show affected bushfire prone properties. White areas are classed as non-bushfire prone. As can be seen by the Mt Victoria example, all properties in the bushfire affected area are grey – that is, bushfire prone properties (Figure 2). (Note the road network is also bushfire prone also).

Figure 2 – Blue Mountains converted bushfire prone land map - Mt Victoria bushfire prone properties


In the Yellow Rock and Winmalee area where most of the homes were destroyed, the entire area is classed as bushfire prone (Figure 3).

Figure 3 - Winmalee, Yellow Rock bushfire affected area - bushfire prone properties

Across the Blue Mountains, non-bushfire prone sites are often located near to central business districts and along the highway and rail corridor. An example of the limited, non-bushfire prone areas (marked white on the map) for Springwood, are shown as follows (Figure 4).

Figure 4 - Map of Springwood non-bushfire prone areas


The NSW RFS BAL Risk Assessment Kit and the BAL Risk Assessment Application Kit (BAL-RAAK), provide guidance on how to calculate a bushfire prone property’s BAL level and the implications of BAL ratings. To determine the BAL rating for a property, one must know:

i. Vegetation type; ii. Distance between vegetation and building;

iii. The effective slope of the ground under the vegetation; and iv. The relevant Fire Danger Index (FDI)3.

There are six BAL rating levels:

BAL-LOW; BAL-12.5; BAL-19; BAL-29; BAL-40; BAL-Flame Zone The following (Box 1) briefly describes the impact of construction requirements according to BAL levels. Box 1 - BAL constructions levels

BAL-LOW - Insufficient threat to warrant specific construction requirements, but residents should still do basic property preparation.

BAL-12.5 - Radiant heat is unlikely to threaten building elements (i.e. unscreened glass). Specific construction requirements for ember protection and accumulation of debris are warranted.

BAL-19 - Specific construction requirements for protection against embers and radiant heat are warranted.

BAL-29 - Specific construction requirements for protection against embers and higher radiant heat are warranted. Some flame contact is possible.

BAL-40 - Extreme radiant heat and potential flame contact could threaten building integrity. Buildings must be designed and constructed in a manner that can withstand the extreme heat and potential flame contact.

Flame Zone - Radiant heat levels and flame contact are likely to significantly threaten building integrity and result in significant risk to residents who are unlikely to be adequately protected. The flame zone is outside the scope of the BCA and the NSW Rural Fire Service may recommend protection measures where the applicant does not provide an adequate performance solution. Other measures such as drenching systems and radiant heat barriers may also be required.

When developing in a bushfire prone area, a Bushfire Assessment Report, (which may include a BAL Assessment Report or a BAL Certificate), may be required. The RFS Single Dwelling Application Kit

3 The Fire Danger Index is the relative number denoting an evaluation of rate of spread, or suppression difficulty for specific combinations of fuel, fuel moisture and wind speed. This data is then indexed into comparative FDIs based on the regions within NSW.


http://www.rfs.nsw.gov.au/__data/assets/pdf_file/0016/4417/User-Guide-BAL-Risk-Assessment.pdf

http://www.rfs.nsw.gov.au/__data/assets/pdf_file/0017/4355/Guidelines-for-Single-Dwelling-Development-Applications.pdf

provides guidance and a tear-out section for applicants to submit their BAL calculations. The building requirements for each BAL are set out in Australian Standard: 3959 Construction of buildings in bushfire-prone areas 2009 (AS3959).

Concerns of bushfire affected residents A February 2015 Local Community Reference Group survey of property owners from the bushfire affected areas, found difficulties with insurance matters and associated rebuilding processes of prime importance. The following survey extracts are examples of typical stressors and innovative ideas for residents trying to recover and rebuild. The comments also highlight the inter-relationship between insurance policy and process, rebuilding information, market behaviours, and incentives for better community preparedness to mitigate damage.

• Keep us informed of any changes in legislation (i.e. effects on insurance) (rebuilding and selling).

• Improve insurance process so you don’t need a law degree to understand your policy.

• More pressure on insurance companies to provide faster and more adequate assistance.

• Insurers knew of the building code/Fire Protection code changes and did not inform their policy holders. They knew policy holders would be under-insured.

• Ensuring building trades are not able to rip you off.

• Easing of taxation of interest income on the house insurance payout monies held in bank accounts while deciding to rebuild.

• Without the extreme elevation of their service costs we would not have been underinsured.

• How alternate non-tested construction material can be tested and assessed for performance.

• We need more help with builders – we just don’t know what to do and we don’t know if the builders are doing the right thing by us.

• Clearer communication on construction standards, more easily understood.

• Fund short courses for residents locally to encourage them to understand the characteristics of bushfires in the mountains and to show them how to draw up a fire plan.

The BAL/insurance dilemma The building construction costs in BAL40 or Flame Zone sites are substantially higher than standard housing costs. Construction requirements for BAL-LOW to BAL-29 are minimal and in effect should have little or no impact on insurance premiums and construction costs beyond that of standard non-bushfire prone homes. BAL-40 and BAL-Flame Zone; however, are a different story. Due to the radiant heat and direct flame contact, construction design and materials must meet a much higher order of building protection and fire resistance.

Fire-affected residents who are rebuilding at properties rated BAL-40 are experiencing additional costs of up to $60,000 and for BAL-Flame Zone properties, up to $150,000. Cost variances largely depend on the style and size of the home. As most of the 197 homes that were destroyed in the fires were built before the new bushfire building regulations came into force, most owners were unaware


of their financial risks and insurance companies did nothing to make them aware. The crux of the disaster recovery and preparedness problem is property owners with old building standards are not aware of these additional rebuild costs until their property is destroyed or damaged.

As indicated above, the higher the BAL rating, the higher the bushfire risk and therefore the greater amount of capital needed for specialised construction requirements. It further goes, the higher the BAL rating, the higher the insurance premiums. The higher the number of under-insured properties, the greater extent of financial and emotional stress that occurs during disaster recovery.

Understandably, households would want appropriate premiums according to their risk liability, appropriate insurance coverage, and insurance policy outcomes that enable them to rebuild to a similar form, efficiently, and according to the building standards that would apply at the time of rebuilding. However, insurance companies and property owners cannot access property specific information about bushfire risk levels (BAL). This is because:

• There is no simple method for property owners to ‘look up’ their property details on a mapping database to find out if their property is classed as bushfire prone;

• There is no database method that can inform a property owner of their BAL rating; • The BAL rating of a property is complex and specific to the property and building

characteristics; and • The building characteristics and fire risk to a property can change over time due to a number

of variables (e.g. changes in vegetation, building additions).

Up until the October 2013 fires, the need for this information would come to light when a developer lodged a Development Application for a dwelling, renovation or addition.

Solving the problem seems somewhat hard. Due to BAL ratings being site specific; that is, based on site characteristics that are not captured or held in any database, it is virtually impossible for insurance companies to confidently calculate accurate insurance levels (exposure and rebuild costs).

For Blue Mountains property owners, this is an unfortunate situation as most of the City’s settlements are built on ridgelines, with many homes in close proximity to very steep slopes adjoining the bushland interface. Despite knowing this, the magnitude of the under-insurance problem is impossible to predict due to the need for individual site BAL assessments. The only information publicly available to property owners is whether their property is bushfire prone or not.

The only current solution to establishing a property’s BAL rating is to have a BAL Assessment Report prepared, or the do-it-yourself approach of undertaking the BAL calculation steps as set out in the RFS Single Dwelling Application Kit. Those in bushfire prone land that lodge a development application have no choice but to work through the BAL classification system, provide a BAL Assessment Report and building estimates.

Problems with BAL Assessment Reports Property owners can engage a consultant to do a BAL Assessment Report for a fee upwards of $300 or do it themselves using the user guides published by the RFS. The consultant fee is a disincentive for homeowners in finding out their level of risk. There are also problems with accuracy of some


http://www.rfs.nsw.gov.au/__data/assets/pdf_file/0017/4355/Guidelines-for-Single-Dwelling-Development-Applications.pdf

reports. Anecdotally, RFS and Council planning officers claim a fair proportion of development applicants get the BAL calculation wrong. The main causes for incorrect BAL are due to the use of wrong vegetation type and calculation of slope. Some paid consultants have produced inaccurate assessments. Furthermore, the planning industry believes some applicants and consultants will work hard to produce a lower BAL assessment to minimise construction costs.

Building industry impacts The Building Code of Australia (BCA), produce the national BAL standards but variations exist within states; for example, vegetation assessments may differ. Construction materials and methods; however are subject to change. Currently the Australian Standard: 3959 Construction of buildings in bushfire-prone areas 2009 is under review (2 year review process).

Construction standards for BAL ratings of BAL-40 and BAL-Flame Zone impose significant increase to construction costs in comparison to ordinary builds, due to the requirement of specialised fire resistant materials. The predictability of these costs is subject to material and contractor availability. When demand is greater than supply, price hikes will occur. As green-field development in BAL-FZ is virtually non-existent these days, and retrofitting of homes to the current standard is also virtually non-existent. The impact of a large scale building losses in a disaster event is likely to have a dramatic effect on prices and supply of specialised construction materials, particularly when the majority of housing (as seen in the Blue Mountains bushfire prone areas) was built prior to the new regulations in 2009.

No one-stop shop for insurance consumer/developer information Finding information on the BAL process, the guidelines, the expected costs, the consulting experts and a property’s bushfire prone status is literally all over the place. Both RFS and the Council attempt to provide clear information to support the bushfire planning and BAL regulations, but obtaining and understanding the information is not easy, nor well integrated. The RFS website directs visitors to Councils to find out whether their property is bushfire prone. Councils direct housing owners and developers to RFS to find information on property preparedness, BAL assessment and building code requirements.

In Australia the peak body for the general insurance industry is the Insurance Council of Australia (ICA). The (ICA) wants an online mapping database that enables users to enter in their address to find out their level of risk. Such a system would also benefit the insurance industry in estimating premiums and level of insurance required. However, the achievement of a reliable system as described would seem unrealistic.

The concern with this approach to bushfire risk mapping is the level of Local and State government resources required to establish current property risk information and the ongoing resources to maintain this complex information as it varies over time due to building structure or neighbouring vegetation changes. There is also an inherent risk to councils and consumers of incorrectly supplied or out-of-date data being used to inform insurance decisions. In the context of the Blue Mountains, this complex mapping approach does not seem feasible from the outset. Providing information without all the relevant up-to-date information exposes the provider to liability and litigation.


Information that does exist The Blue Mountains City Council is more advanced than most Councils in providing online mapping information of bushfire prone land (e-Maps4). However, the online user interface of this system is quite old and unsophisticated. In addition, there can be issues where the user is unable to find their property address in the map database.

The RFS has a far more modern and user friendly online tool5 that is used to provide information on the new 10/50 vegetation clearing laws (Figure 5 and Figure 6). With this online tool, the system is reliable in finding the users property details and indicating whether the property is affected by 10/50 vegetation laws or not (Figure 6).

Box 2 - RFS website information to direct traffic to councils

RFS Website 6

“To find out if you live in a bush fire prone area, contact your local council and ask to view your local bush fire prone land map. This information will also be noted on the 149 Certificate for the property, obtainable from council.”

Figure 5 - RFS 10/50 Vegetation online map tool

4 http://www.bmcc.nsw.gov.au/bmccmap/Disclaimer_bmccmap.cfm 5 http://www.rfs.nsw.gov.au/plan-and-prepare/1050-vegetation-clearing/tool#tool 6 http://www.rfs.nsw.gov.au/plan-and-prepare/building-in-a-bush-fire-area/planning-for-bush-fire-protection/what-is-a-bush-fire-prone-area


Figure 6 - RFS 10/50 Vegetation on line map tool

The RFS website is also the most practical site for users to gain information on BAL assessment guidelines and related information on planning and building in a bushfire prone area7.

Where should information and guidance sit? It is proposed that the NSW State Government and the insurance industry are key stakeholders in the current discussions around insurance and the BAL. The Federal Government also plays a role in how it influences the regulation of the insurance industry8 to act in the best interest of its consumers. At the local government level, many Councils would struggle to justify investment in technological resources for improving online BAL information, ahead of all their other service priorities, which are increasingly constrained by available rate revenue. The supply of improved information should also be consistent across the State. In the case of the RFS it currently receives revenues for its operations through insurance premiums. Hence, a relationship between insurance

7 http://www.rfs.nsw.gov.au/plan-and-prepare/building-in-a-bush-fire-area 8 Australian Prudential Regulation Authority (APRA) is the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most of the superannuation industry. APRA is funded largely by the industries that it supervises.


and BAL policy already exists at a fiscal policy level, though the ICA has been lobbying for this arrangement to change. The ICA seeks:

“Commitment across all Governments to encourage greater personal responsibility in the community through implementation of recommendation number 79 of the Henry Tax Review to abolish all insurance taxes, including fire services levies”9

In the meantime the ICA are championing their own systems solutions to hazard data mapping and information (Figure 7) and encouraging local governments to get on board with contributing local risk information to their systems.

Figure 7 - ICA hazard insurance solutions

Even if this was to be a successful data capture approach, the system would appear to only enable the “distribution of hazard related information to insurers for their voluntary use” (ICA - Figure 8). What are the implications of ‘voluntary use’? Will some insurers continue to be allowed to use postcode-based pricing in some areas for some natural hazard risks? Furthermore, how would insurance companies value the differences in local different development controls and other mitigation practices?

9 http://www.insurancecouncil.com.au/issue-submissions/issues/10-point-plan-to-tackle-disasters


Figure 8 - ICA Data Globe purpose and use of

Changing business and consumer attitudes is fundamental The startling fact remains that for investment in more complex online information systems to be justified, changing attitudes towards insurance and knowing your risk has to be at the forefront of the system design. For example, reports from bushfire affected residents indicate many insurance sales representatives do not even know what a BAL is. If we were to conduct a survey of our community, including local Council staff and local RFS volunteers, we would undoubtedly reveal that most people do not know their BAL rating and whether they are adequately insured. The centre of this problem is that unless they are lodging a development application, most would have no interest in finding out.

Insurance calculators – useful or not? The ICA promote the Cordell Residential Valuer (Figure 9 and Appendix 1 for more detail) to calculate the rebuild value of a property. The calculator does not allow the user to enter the BAL rating of their property. ICA have verbally advised to get around the absence of BAL information and property risk, these insurance calculators will add a contingent sum to cover variables.


Figure 9 - Cordell Residential Valuer

What is confusing for the insurance consumer is the approach that different insurance companies take to produce an insurance quote. It is apparent from review of several insurance company websites that there is an array of calculators being used by the industry, not just Cordell. Importantly, messaging used in online calculators may lead to confusion about household property risk.

Messaging to insurance consumers Investigations into online calculators reveal there is a stark difference to the way the US is approaching its messaging and incentives to housing consumers. For example, the US firm State Farm Insurance10, guides online insurance enquiries by stepping consumers through the following prompts:

HOW TO DETERMINE YOUR HOME INSURANCE COVERAGE…

• Understand the value of your home. • Make sure that your home is insured for at least 100% of its estimated replacement cost. • Understand the difference between market value and replacement cost. • When buying a new home, be sure to obtain a replacement cost estimate. • Be aware of any architectural details or unique building materials that may affect your

estimated replacement cost. • A contractor or appraiser can help estimate your home’s replacement cost. • Review your home-owners insurance coverage annually to make sure that your coverage

meets your needs.

Rural Fire Service – Preparedness Education In NSW the RFS plays a primary role in promoting household preparedness. Promotion of insurance through the RFS household preparedness Get Ready campaign11 (Figure 10) is not a key feature of

10 https://www.statefarm.com/insurance/home-and-property/homeowners/determine-home-insurance-coverage 11 http://www.rfs.nsw.gov.au/news-and-media/general-news/get-ready-weekend


preparedness education. Campaign emphasis is primarily focused on education formats such as the RFS Bushfire Survival Plan; yet, emergency management researchers are indicating that investment in community education initiatives have not achieved any substantial change in community behaviours and attitudes.

Figure 10 - RFS Get Ready campaign

The Insurance sector has the potential to change household behaviours and attitudes around under-insurance and risk management.

Improved insurance marketing and financial risk campaigns that generate household incentives and disincentives, like those demonstrated in the United States example above, may go a long way towards converting under-insurers and encouraging households to mitigate their risks.

Insurance innovation – the link between premiums and mitigation In the United States insurance companies drive consumer thinking on risk exposure and level of preparedness. Appendix 1 contains a recent United States article on Positive connection: Two ways that insurers are constructively involved in addressing wildfire risk12”. The article states:

“If insurance was more involved in wildfire loss, some say, the problems of development, risk exposure, and preparedness would be solved.”

The article further outlines the benefits of community preparedness, as opposed to just building standards, to reduce risk and subsequently insurance premiums:

“USAA Insurance has worked with NFPA’s Firewise Communities/USA Recognition Program to reward policyholders in participating communities in California with discounts, because

12 http://www.nfpa.org/newsandpublications/nfpa-journal/2015/may-june-2015/columns/wildfire-watch


http://firewise.org/usa-recognition-program.aspx

the company sees a correlation between neighbor-to-neighbor, volunteer-based preparedness and property-loss reduction”

In contrast to the United States, the Australian insurance industry, as far as we are aware, is not in any significant way addressing premium discounts for bushfire property owners who have reduced their risks. The ICA recently stated to Council officers that they recognise the effects of local development controls, environmental engineering, and management practices in reducing risks, but have no way of making these assessments.

Summary of insurance intricacies Discussions with the ICA further highlight other issues in managing insurance expectations:

• Insurance companies are perceived to be ripping off customers when they encourage to insure for BAL 40, BAL-FZ;

• Concern in the insurance industry that people are trying to over-insure; • Better information to households does not improve insurance coverage where affordability

problems exist. Some households cannot afford the desired level of cover – better to be partly insured or not insured at all;

• Households do not know the cost of rebuilding without expert advice; • Households are not understanding their risk or their insurance policy; • Until households see evidence of the fire risk to their property, they ignore the problem; • Contents insurance is being used to cover shortfall; • Calculators can be underinsuring and there is no easy way to tell. It is virtually impossible to

confidently calculate accurate insurance levels (exposure and rebuild costs); and • Some insurance companies will not insure BAL rated homes.

Productivity Commission Inquiry into natural disaster funding The timing of this discussion is appropriate considering the Minister for Justice, the Hon Michael Keenan MP wrote to his state counterparts on 1 May 2015 foreshadowing consultations on the best way to address the findings of the Productivity Commission Inquiry Report into Natural Disaster Funding Arrangements (1 May 2015). Appendix 2 is an extract of the Commission’s view on the role of insurance and the need for change in managing the effects of natural disasters. The Commission has made a number of key recommendations affecting the insurance industry and its consumers, and the requirement for publicly shared risk-based information (Box 3, 4, 5 and 6). The latest Inquiry Report makes no mention of the role of BAL assessment complexity in determining bushfire risk and associated premiums and insurance cover; however, the review of the Productivity Commission’s recommendations is still in progress.

Box 3 - Productivity Commission Recommendation - Natural Disaster Funding Arrangements 4.2

Recommendation 4.2

State and territory governments, local governments and insurers should explore opportunities for collaboration and partnerships. Partnerships, for example, could be formed through the Insurance Council of Australia and state-based local government associations (or regional organisations of


councils). Consideration could be given to the Trusted Information Sharing Network model. Partnerships could involve:

-governments sharing natural hazard data that they already hold and undertaking land use planning and mitigation to reduce risk exposure and vulnerability

- insurers sharing expertise and information (for example, claims data) to inform land use planning and mitigation decisions

- collaboration to inform households of the risks that they face and to encourage private funding of mitigation through incentives such as reduced premiums.


RECOMMENDATION 4.4 State and territory governments should prioritise and accelerate implementation of the Enhancing Disaster Resilience in the Built Environment Roadmap, including reviewing the regulatory components of vendor disclosure statements. The Land Use Planning and Building Codes Taskforce should be tasked to identify and consider options for regular, low-cost dissemination of hazard information to households by governments and insurers.


RECOMMENDATION 4.8 State and territory taxes and levies on general insurance should be phased out and replaced with less distortionary taxes.



RECOMMENDATION 4.9 Insurers should provide additional standardised information to households regarding their insurance policies, the natural hazards they face and indicative costs of rebuilding after a natural disaster. This work should be led by the Insurance Council of Australia developing guidelines, within one year, to ensure consistency in the provision and presentation of this information across insurers.

Opportunities/Solutions This report illustrates the interplay between property insurance and the BAL assessment. Going forward solutions that involve conversation, cooperation, consultation and collaborative approaches among stakeholders who are vested in these two matters (insurance and BAL), will produce the best results.

If not addressed effectively, the burdens of underinsured households following a disaster will fall across all levels of government and the insurance and building sector. Insurance regulation is a Federal Government and Insurance Industry concern; planning and regulation for bushfire mitigation primarily rests with the State Government, but also concerns Local Government. This report acknowledges the key role of RFS and State government and the insurance industry.

Solutions need to be simple, sustainable and affordable. There is a danger that complex systems, such as discrete mapping information at property level, will in fact create more complexity, be expensive to manage, and create an unfair and onerous burden on local government resources to develop and maintain. Caution is also suggested in making the priority tasks focus on sophisticated mapping systems. It is not as if relevant information and systems solutions are not already available. For the interim, better organisation, promotion and integration between RFS and local councils would result in significant improvement.

The investment opportunity for the immediate term is in developing consumer marketing techniques that motivate people to know their BAL and take out appropriate insurance. In the longer-term the insurance sector is best placed to change consumer behaviours.

Insurance industry investment in BAL assessment, as opposed to complicated BAL mapping data; may prove to be the simplest and most effective way of making insurers and the insured aware their risk and exposure. From a local government perspective, this is an issue and contract between insurers and insured, just like motor vehicle insurance. The insurance policy would require certain information as part of the contract just like a registration vehicle road worthiness certificate. Local government would be in a position to provide the certificate on a fee for service approach. Local Government is under financial resource pressures and is unable to increase its roles and responsibilities without remuneration.

With stakeholders working together to achieve effective integrated solutions, the flow-on effects will produce opportunities that should:

• Improve rates of appropriate insurance cover- assisting household to bounce-back following a disaster event;


• Deliver effective strategies to address rising insurance costs through premium reduction incentives that could improve the take-up of insurance across the board. ;

• Link insurance incentives to better individual and community preparedness to improve the safety and wellbeing of at-risk communities and lower insurance claims processing;.

• Reduce servicing of insurance, building enquiries and complaint handling. ; • Improve turnaround of development applications through provision of accurate BAL

assessments.; • Reduce the stress of disaster recovery for affected residents, through faster claims

assessment. ; • Minimise government reputational risk and blame shifting after a disaster occurs, by having

home owners take greater responsibility for their risks; and • Reduce impacts on business continuity following a major disaster event.

In addition, it is important to note that the Local Community Reference Group assigned to represent community needs of the October 2013 bushfire affected community will continue to meet until October/November 2015. The Local Community Reference Group has indicated a strong interest in being a part of ongoing conversations and consultation on insurance solutions. Their housing consumer and recovery experiences should be highly valued in this instance.

Finally, it should also be recognised that progress has already been made from RFS and Council officer discussions. There is also a commitment of Council and RFS in supporting the BMEE Bushfire Build Expo to be held in September 2015 and the Insurance-Burning Issue seminars to be held July-August 2015, which will include education on the implications of BAL ratings.

Solutions to the problems and opportunities presented in this report are captured into two baskets: those that can potentially be accommodated immediately and will provide quick wins, and those that need development and commitment of resources over a longer-term.

Hence, a number of moving forward strategies (Table 1 and Table 2) are proposed.

Table 1 - Quick-win solutions

Proposed Actions/Solutions Stakeholders Initial Action/ Coordination by:-

1 Approach RFS to investigate the development of an online system tool for identifying bushfire prone properties that uses similar systems smarts as the 10/50 vegetation online tool.

RFS / Local Councils

BMCC

2 Subject to solution (1) being supported, revisit all local and state communication methods to ensure consumers are directed to RFS site.

RFS/Local Councils

RFS – state coordination BMCC – local information


3 Request the ICA/RFS to meet with the Community Reference Group and BMCC communications officers to develop an immediate low-cost and sustainable messaging/communications strategy specifically for the Blue Mountains to encourage appropriate household insurance cover ahead of next fire season.

ICA/BMCC/RFS Recovery Steering Group

4 BMCC and Local Business Industry Associations continue to develop opportunities to build word-of-mouth advocates and ensure business continuity by running workforce training seminars on ‘know your BAL/ and be insured”. (This could be timed around the RFS Get Ready campaign).

BMCC / BMEE & other local industry associations/ ICA

BMCC BMEE

5 Inform the Federal Government and Productivity Commission of the absence of BAL assessment complexities in the formulation of its recovery funding reforms and insurance recommendations.

ICA/Councils State and Federal Members

Table 2 - Longer-term approaches

Proposed actions/solutions Stakeholders Initial Action/ coordination by:-

6 Investigate and advise the Recovery Steering Committee on the merits of establishing a State-led “taskforce” to investigate, recommend and/or implement improved systems solutions, and to monitor the progress of improving bushfire prone insurance matters raised in this report.

Federal/State/Local governments/ ICA and bushfire communities.

State member

7 Subject to solution (1) being supported, encourage the RFS and ICA to explore the potential of linking insurance incentives for mitigation, to the same portal.

RFS/ICA RFS

8 Investigate and advise the Recovery Steering Group on the status of regulatory powers that ensure insurance companies keep their policy holders informed of building regulatory changes and effects on insurance policy cover.

ICA/Federal Government

Federal member

9 Investigate the appropriateness/benefit of including ‘know your BAL/ and be insured’ messaging in the RFS “Get Ready” household preparedness campaign (launching mid-September 2015).

RFS RFS


Recommendations to the Local Recovery Steering Group That the Local Recovery Steering Group:

1. Note the report findings and proposed solutions (1-9); 2. Note that the Blue Mountains City Council welcomes any future opportunity to provide input

into government or industry-led initiatives proposed to develop a solution to the bushfire insurance dilemma;

3. Note the LCRG request to consider a ‘taskforce’. Noting that, the Local Community Reference Group has indicated a strong interest in being a part of ongoing conversations and consultation on insurance solutions (note the LCRG will only be a Council committee for a further five months); and

4. Note the option of writing to the RFS to highlight the issues in the report which focus links between the insurance industry and BAL with various suggestions such as the provision of a one-stop online shop. This would be a main information source for referencing individual property information against a bushfire prone map, linked to providing additional services such as 10/50 vegetation information, BAL assessment guidelines, and information to reduce household risks.

Local Recovery Steering Group Feedback Solution # Comment Date 3 & 7 Insurance incentives should ensure renters are protected from

property investors that take advantage of reduced premiums without the appropriate property mitigation

2 June 2015

8 Regarding the Insurance regulations, the office of the Assistant Treasurer, the Hon Josh Frydenburg has advised that Insurance regulation falls under the jurisdiction of APRA as per below. The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. APRA currently supervises institutions holding $4.9 trillion in assets for Australian depositors, policyholders and superannuation fund members. Louise wrote to the then Assistant Treasurer, The Hon. Arthur Sinodinos, on the 6th November 2014 regarding the BAL ratings and the effect on Insurance for home owners who suddenly found themselves underinsured.

2 June 2015

5 Louise also addressed some of the concerns regarding insurance in her submission to the Productivity Commission and also verbally discussed this with them (The Commissioners).

2 June 2015

6 In developing solutions to the insurance dilemma governments should be conscious of the potential unintended economic or

14 July 2015


environmental consequences that may occur from imposed new systems and laws. It is imperative that new systems or laws are not abused for the wrong reasons. For example, unlawful removal of adjoining forest to lower property BAL ratings.

6 A Community Reference Group member has suggested the State establish a community reference group under a State-led taskforce, which could consist of nominees from various bushfire risk regions.

1 July 2015


Version control Version By Date 1 Draft report S. Johnson 2 June 2015 2 Corrections page 23, Fig 10 & addition of feedback

section S. Johnson 9 June 2015

3 Proof reading corrections S. Mehmet 9 June 2015 4 Addition of ‘unintended consequences’ to Section

“Steering Group Feedback” item 6 S. Johnson 22 June 2015

5 Date correction page 3 S. Johnson 1 July 2015 6 In reference to recommendation 4a, a further

recommendation by CRG member has been made and reflected in “steering Group Feedback” item 7

S. Johnson 1 July 2015

7 Minor sentence corrections page 7 and 8 by DCHS C.Brogan 6 July 2015 8 Minor sentence improvements page 15,

recommendation 4b. and Steering group feedback page 24

S.Johnson/ GM 14 July 2015

9 Minor sentence improvements, deletion of references to LRSG members and changes to recommendations (to be ratified at next Local Recovery Steering Group meeting)

Dr P. Hamdorf 20 July 2015


Appendix 1 – Cordell calculator


Appendix 2 – Productivity Commission inquiry into natural disaster funding arrangements Insurance13

Price signals provided by insurance can be an effective way to convey information about risk and encourage risk management. The Commission’s analysis suggests that, in general, insurance markets in Australia for natural disaster risks to private assets are working well. Much progress has been made in recent years, with improvements in information collection and better analytical tools by insurers having led to more accurate and granular pricing of natural disaster risk. That said, the Commission received evidence of insurers still using postcode-based pricing in some areas and for some natural hazard risks.

Insurance policies may not be effective in encouraging mitigation where the price signals are not risk reflective or are distorted by specific insurance taxes or levies. Taxes and levies significantly raise the cost of insurance and contribute to non-insurance and underinsurance. They should be phased out and replaced with less distortionary taxes.

More risk-reflective insurance pricing, combined with the inclusion of flood cover in policies and the expensive natural disasters of recent years, has resulted in significant increases in insurance premiums for some properties. While these price rises are unwelcome to affected property holders and may lead to non-insurance or underinsurance, they send an important price signal about the level of natural disaster risk.

In some cases, underinsurance is compounded by information asymmetry in the insurance market, with consumers not understanding their natural disaster risk or their insurance policy, or alternatively insurers not recognising mitigation measures taken by households. Insurers can and should address this information asymmetry by improving the information provided to consumers about natural disaster risk. This could include information on natural hazards in their area, indicative rebuilding costs and examples of household-level mitigation options.

In cases where non-insurance and underinsurance are primarily due to the affordability of insurance, better information is unlikely to improve coverage. This can be a difficult issue to address, particularly where high premiums affect disadvantaged households. Subsidising premiums for these households would dull incentives to manage the risks, and would be a short-term and potentially costly solution. Governments may need to consider structural mitigation measures (such as flood levees) or relocation options.

International experience has shown that government intervention in property insurance markets through subsidies is overwhelmingly ineffective. It creates moral hazard as well as fiscal risks. Some foreign governments have had to bear significant costs following large natural disasters because their insurance schemes failed to accumulate adequate reserves.

13 Productivity Commission inquiry into natural disaster funding arrangements Volume 1, page 32


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