bcc subject New submission

~itle:MS First Name: Annabelle surname: Butler

suburb: Me1 bourne postcode: 3004 state: VIC Telephone: Main Topics: other: Non/under insurance, affordability, behavioural economics of under/non insurance- Towns 1: Towns 2: Towns 3: Acknowl edsements:

* I understand that Ican be contacted by the Royal Commission in relation to my submission. Iwould like to receive future updates about the activities of the Royal Commission.

SUBMISSION TO THE VICTORIAN BUSHFIRES ROYAL COMMISSION

Contents

Introduction ...... 3 Executive Summary ...... 4 Section 1: Event Management and Response Capability ...... 6 The Insurance Experience ...... 6 Key Lessons Learnt from Black Saturday ...... 6 Practical Issues ...... 8 Recommendations ...... 9 The Banking Experience ...... 10

Section 2 .Affordability of lnsurance/Non lnsurance/Under Insurance ...... 12

Current Research .Affordability ...... 12 Industry Response -Suncorp Group ...... 14

Affordability .Product Innovation ...... 14 Under Insurance ...... 14

Industry Response .Suncorp Group ...... 15

Section 3: Behavioural Economics of Under and Non lnsurance in Bushfire Affected Areas . Observations from Price Demand Analysis of Insurance Uptake in Risk Prone Areas ...... 18 Level of under insurance and pricing implications for total loss and replacement policies ...... 18 The Analysis ...... 19 The Cost of Insurance ...... 20 Channel Selection...... 21 Higher Excess ...... 21 Pay by the Month ...... 22 Selective Risk Cover (Building vs . Contents) ...... 22 Conclusions ...... 23 Recommendation...... 23 SUBMISSION TO THE VICTORIAN BUSHFIRES ROYALCOMMISSION

Introduction

The following submission from Suncorp represents a group view in response to the Victorian Bushfires Royal Commission's call for information in regards to the events of Black Saturday - 2009.

The Suncorp Group consists of various types of financial services providers including:

General lnsurance (AAMI, Apia, GIO, Shannons, Just Car lnsurance, Suncorp Direct, Vero Travel and two internet insurers, Bingle and InsureMyRide).

Commercial lnsurance - GIO, Vero and VeroProfin

Banking - Suncorp Bank

Suncorp Wealth Management and Financial Planning, Suncorp Investment Management Limited (SIML), Asteron (Australia and New Zealand),Tyndall (Australia and New Zealand), Standard Pacific, Guardian Financial Planning, Guardian Trust (New Zealand) and Cameron Walshe.

The following paper gives an overview of Suncorp's experiences during the events of Black Saturday and the following weeks. It looks at experiences from both an anecdotal level, with feedback being given by staff who were on site lodging claims and later, assessing homes/businesses, and from an analytical perspective in regards to numbers, costs and ongoing consumer behaviour. Additionally, it looks at the current method of funding for the Victorian Country Fire Authority (CFA) and the Melbourne Fire Brigade (MFB) and makes some observations regarding ongoing viability and other methods of revenue raising to support thesevital organisations.

Suncorp, along with IAG (RACVIIMA, CGU), have the majority of market share in domestic insurance in Victoria. The Suncorp brands received 26% of claims made in the Black Saturday bushfires.

All questions or comments in the first instance should be directed to:

Rob Whelan Executive Manager, Policy and Projects - Personal Insurances

Annabelle Butler SUBMISSION TO THE VICTORIAN BUSHFIRES ROYALCOMMISSION

Executive Summary

The Black Saturday tragedy saw the deployment of massive public sector and private sector resources to meet the challenges of recovery and reconstruction.

The insurance industry and in particular the Suncorp Personal Lines lnsurance Group, which is one of the largest single insurers for the affected areas, committed substantial physical and financial resources to meet the demands of customers and government instrumentalities in the aftermath of the fires.

This submission seeks to inform the Royal Commission of the efforts made at both the physical/logistical level and the financial level, pointing out those factors that both contributed to the response and also those that acted to hinder a more effective response. The submission also provides suggestions for both policy and procedural changes that will assist in ensuring a more effective response to future events.

Suncorp has conducted a thorough review of the impacts of this event on our business and the effectiveness of the actions and activities that constituted our response. This review has highlighted a number of relevant issues that can be factored into how the Suncorp Group should restructure its disaster management capabilities for future large scale events. Additionally it has highlighted issues in relation to accurately pricing risk compared to the estimated costs of such an event.

Importantly these issues have relevance for the realm of public policy, particularly as it pertains to the issues of under and non insurance and the co-ordination of recovery activities and dissemination of critical information during the initial response phase.

The submission is in three parts:

1. Lessons learned for event management immediately post the disaster

2. Under and Non lnsurance

3. Insights on the behavioural economics of insurance pricing, based on analysis of insurance price and demand relationships in the affected bushfire areas.

In each section, proposed policy recommendations are provided to assist the Royal Commission in its deliberations and final recommendations.

In summary, these recommendations are as follows.

1. Victorian Government to set up a permanent disaster management taskforce, made up of all key stakeholders (ministries, insurers, emergency services, industry bodies etc.). This taskforce comes into being when a major event occurs to allow co-ordination of relief efforts by the different parties. Additionally this taskforce can be the major conduit of communication regarding recovery efforts, management of sites, OH&S issues, access issues etc. SUBMISSION TO THE VICTORIAN BUSHFIRES ROYAL COMMISSION

Standard warning signage for affected sites in a disaster area needs to be agreed and published.

Better understanding by all stakeholders of OH&S issues resulting from extreme temperatures e.g. disintegration of asbestos, burning out of tree roots.

lnsurers to work closely with government to make use of bulk public clean-ups and explore compliant fast track ways of dealing with fibro asbestos in the most economical way.

Fast-track building applicationfapprovals with local government.

Acknowledgement and understanding that insurers play a key role in, and are well experienced at helping to rebuild communities after an event. lnsurers expertise is in claims management. Therefore allowing insurers a greater role initially in the event managementfco-ordination would help to reduce the impacts of an event on the local community over the long term.

Funding of the CFAfMFB- the current system of levies is inequitable due to the rate of non insurance. The following paper recommends that levies should be collected using the local council rates, rather than on insurance policies (which impacts affordability of insurance and in turn contributes to the number of consumers deciding not to purchase insurance or to under insure).

Improved funding of the CFA - to enable them to have paid permanent fire fighters in regional areas and access to more equipment if needed. SUBMISSIONTO THEVICTORIAN BUSHFIRES ROYAL COMMISSION

Section 1: Event Management and Response Capability

The Insurance Ekperience

Suncorp's lnsurance Group was greatly affected by Black Saturday. Overall the Suncorp Group received 2,561 claims. Of these, 1,105 were AAMl's, 553 were GlO's and 462 were Apia's. The remainder were distributed across commercial insurance and the smaller personal insurance brands which form part of the Suncorp group. These were also affected, but not to the same magnitude.

In preparing the following comments, extensive discussions were held with the front line staff of the Suncorp General lnsurance business. This included assessors, claims managers and senior management. Although the brands had slightly different views in regards to parts of the process- due to different customer demographics, there were some clear similarities in the feedback given.

Additionally, some of the feedback from our businesses will be woven into our Disaster Recovery Plan for future events. Our process review has provided valuable insight in how we as a group can improve our response to extreme events such as the Black Saturday fires. An example of this is that we may now issue key staff with satellite phones which do not depend on local mobile networks for their reception (as telecommunications were an issue at times).

Access to early warning advice and information

This paper does not endeavour to comment on access to early warning advice and information. This topic appears to have been extensively covered by the Royal Commission in other submissions and public statements-such as the ABC Four Corners Program.

The largest issue from an insurer's view is knowing which postcodes are affected. It is practice that when a postcode is under red alert (these categories being supplied by the CFA) the insurer will not underwrite in that area, or if they are underwriting, the policy will have a window of time built into it whereby certain events won't be covered during that time, for example bushfires. This is commercially sensible and equitable, it needs to be remembered that insurance is about pooling risk for a community as a whole and is to protect against unforeseen events. If the insurer were to accept a known risk (such as this) it would be unjust for the other policy holders, as they would now have to carry the cost of this risk in their policy (via future price rises). Additionally, it would be a breach of fiduciary duty to insurers' shareholders and breach of reinsurance arrangements.

Coordination of industry taskforces and individual company management teams in the immediate post event timeframe

Once the full effect of the devastation was realised the insurance industry via the lnsurance Council of Australia moved quickly to form an Industry Taskforce on the Monday following Black Saturday. This met immediately and started to co-ordinate the insurance industry relief efforts. This included SUBMISSION TO THE VICTORIAN BUSHFIRES ROYAL COMMISSION establishing a single point of contact for the Victorian Government, and provided a method of relaying messages to and fro between the insurers and the Victorian Government. Overall the insurers saw this as an efficient method of communicating and understanding Governmentfstakeholder needs. It allowed the insurers to do what they do best, to effectively manage the aftermath of large events.

Within the businesses the Suncorp Personal Lines lnsurance Group set up its own emergency response teamfs. Some met on the Sunday morning and started to implement the Disaster Recovery procedures that the businesses have. Examples of this include:

ringing all insureds in the affected postcodes to let them know what they needed to do if they wished to lodge a claim,

checking non renewal customers in the affected postcodes to ensure they had insured elsewhere (i.e. they still had cover),

placing advertisements in all major papers to inform insureds what they needed to do to lodge a claim,

putting information, updates and advice on all websites;

releasing press statements to encourage insureds to lodge a claim if they needed to.

The following week saw the businesses preparing Q&A statements to inform insureds of the process they needed to undertake, what the policy covered and what type of relief was immediately available for example: emergency funds, accommodation and counselling services.

The operational parts of the business, i.e. the claims managers and assessors, established portable claims centres in the affected areas, where branches were not available, for example in Whittlesea. Insureds were able to start lodging claims in person on the Monday afternoon at these sites across Victoria. In other areas, such as Churchill, insureds were able to go to local branches or lodge claims via call centres.

Feedback from staff has been that customers varied in their mental state, from fully traumatised to practical. Staff often played the role of counsellor as well as claims manager and provided a lot of support to the affected communities in the aftermath of Black Saturday and the following high alert weeks. lnsurance claims staff are some of the first people to be involved in a major event and provide a vital support mechanism for those affected.

Contents claims started to be paid almost immediately. The businesses have the capacity to transfer the funds electronically, so once a claim was finalised the funds were transferred into the insured's bank account. Depending on the location, the brand and the availability of imagery (for example using over head pictures of properties), contents claims were settled almost immediately.

Building claims were more difficult. The Suncorp brands offer different types of cover, from sums insured (Apia) to complete replacement cover (AAMI) -which guarantees replacement of buildings to their original standard with no financial limitation on the cover. The GI0 brand has a 25.30% buffer built into its building cover which is designed to protect insureds from under insurance (often caused by unexpected rebuilding costs, e.g. price inflation due to demand in a large event or SUBMISSION TO THE VICTORIAN BUSHFIRES ROYALCOMMISSION

changed building code requirements). As affected areas were closed, assessing could not begin until the government agreed that assessors could go in and the businesses decided it was safe for their staff to doso. At the time of writing there are only a handful of assessments left to complete which are the result of insureds being unable to engage with the insurer often because they are still dealing with the magnitude of the tragedy.

Motor claims were dealt with largely by trust. If an insured lodged a claim, it was assumed that the vehicle was destroyed and the claim was settled. The Vin Numbers were then supplied to the insurers via the Insurance Council of Australia which allowed insurers to cross reference payments to cars that had been destroyed. Payments commenced as soon as claims were received, enabling insureds to purchase essential transport.

Firstly it needs to be recognised what an exemplary job the CFA, MFB, the Victorian Police, the Army and all other services did in responding to this unprecedented event. Without the fortitude and dedication of these people, it is likely that more lives would have been lost and the repair and reconstruction process would have been far slower. Suncorp would like to thank them all for their extraordinary efforts.

The following provides a summary of feedback from our on the ground staff, in relation to what could be done next time to make their role easier and Suncorp more effective in responding to a major event in Victoria.

Lack of co-ordination -Authorities were good at communicating regularly with affected people via community meetings. However there was no official communication process to discuss issuesfprovide information to on-site insurers and other service providers. This would have been very useful as we were relying on staff attending community meetings (which they did) and relaying information back. As insurers' issues were not discussed, information was patchy and at times inconsistent. An example is access issues, one insurer accessed sites far earlier than the other insurers, which led to some disgruntlement between customers. Subsequently all insurers were removed from the Mountain which indicates that there were unsafe work conditions. Although the lnsurance Council of Australia's conduit provided high level information, on the ground information was hard to get. Additionally, different emergency services had different information and views about how insurers should act, e.g. what hazards there were or the risk status of surrounding areas from fire (as surrounding towns were on high alert for two weeks post Black Saturday).

OH&S issues/asbestos - This was a pressing issue for the Suncorp Group. Contradictory messages from authorities regarding the dangers on site (of burnt housesfareas) especially in regards to asbestos meant that the Group was unsure whether or not it was safe to send in assessors. The major concern was whether or not the asbestos had disintegrated (due to the heat of the fire) and was therefore in the air. Additionally information was only provided in regards to the Kinglake area. Other affected areas such as Churchill or Bendigo had no information or warnings. As an employer, the Suncorp Group will not send staff into what maybe unsafe working conditions. Therefore the SUBMISSION TO THE VICTORIAN BUSHFIRES ROYALCOMMISSION

Suncorp Group waited until the government gave the go-ahead to allow people into the affected areas. However it was still, even at that point, unclear whether or not it was safe to go on-site.

Understanding markings and tagging on trees - Once assessors were allowed into the Kinglake area, concerns were voiced regarding markings on trees, for example there were various coloured tags and crosses. This was both confusing and concerning for staff, as they were unsure whether or not they should enter properties and what hazards they should be alert to. It is recommended that a standard tagging system be developed and made publically available so that insurers are able to inform their staff whatvarious markings mean (for example is a tree unsafe?) and whether or not they should enter the boundaries of the property.

Concentrated effortrather than evenly spread - Feedback from staff and customers from the non Kinglake/Marysville areas such as in the Gippsland and Bendigo regions, which were also affected by fire on Black Saturday, has been that they feel like the forgotten victims. Naturally the majority of attention has been on the areas hardest hit, however there appears to have been inequity in the sewices provided to other communities (for example property clearance).

Removal of debris and site clean-up- With any natural disaster involving housing there is always the taskof cleaning up the local vicinity (common and private land and roads). Insurers always like to work with Government authorities (sometime the Armed Forces) to do this as quickly and effectively as possible. While the process for the Black Saturday fires has been for a contractor to clear sites free of charge, lengthy delays and the urgency of customers wanting to get on with their lives has meant that the GI0 and AAMl brands have been obligated to pay the insured for the removal of debris regardless of the zero cost later on.

In the future, it would be preferable for the insurers to work closely with government to make use of bulk public clean-ups and explore compliant fast track ways of dealingwith fibro asbestos in the most economical way.

Fast-track building application/approvals with local government - It is in the best interests of home owners and insurers to fast track building scopes of works and DA's at a local government level. This happened in Innisfail after Cyclone Larry and was of substantial benefit to home owners and the insurers. In future, the Suncorp Groupwould like to work closely with Government event co- ordination authorities to do this.

Regrettably, if global warming predictions are correct events such as Black Saturday will become more frequent as time goes on. Therefore it is imperative that Government/communities and industry start to look at how it can respond more effectively in the future.

1. Suncorp recommends that the Victorian Government look at setting up an emergency taskforce which is permanent, but meets infrequently, other than in times of need. This taskforce can be made up of all major stakeholders in these kinds of events. For example, State Government ministries, local government representatives, emergency services SUBMISSION TO THE VICTORIAN BUSHFIRES ROYALCOMMISSION

representatives, general insurers, industry bodies etc. This taskforce can initially produce plans for large event responses. On an ongoing basis it could co-ordinate responses and monitor the effectiveness of the response, until the event is over. There is a similar model operating in Queensland, which from the insurers'view, has worked well over the last few years to help support organisations respond effectively to large events.

It needs to be understood that for efficient clean up after an event, insurers need to be involved from the beginning of the relief effort It makes itvery difficult for insurers to effectively start to process a claim if they are not involved from the outset (i.e. for the insurer to understand the magnitude of the event, so they can start to manage it appropriately via the allocation of resources, contractingof suppliers etc.). Additionally all major insurers in the area need to be involved (in this case, AAMI, GIO, CGU and RACV).

In the future, it would be preferable for the insurers to work closely with government to make use of bulk public clean-ups and explore compliant fast track ways of dealing with fibro asbestos in the most economical way.

Fast-track building applications/approvals with local government - it is in the best interests of home owners and insurers to fast track building scopes of works and DA's at a local government level.

The Bankjlng Experience

Suncorp bank does not have a direct presence in the areas affected. However it is used to dealing with customers who have been affected by a large event for example, the flooding in Queensland over the last 6 months or so.

Banks haveevent management models that can assist directly with customers who have experienced a large event, for example they have relief packages available, branches can be opened outside normal trading hours etc. For banks, the issue moving forward is to harness those options and add others to improve banks ability to help the consumer in the first few days post a large event.

Keeping this philosophy in mind the key lessons that were learnt from Black Saturday are as follows.

Customer Identification

The banking industry needs to develop a protocol, process or arrangement that nimbly assists customers who have lost all of their formal identification. An issue that arose from Black Saturday, was that people were so traumatised by their awful experiences, that they were unable to provide basic ID (whether tangible or intangible-e.g. answers to identifying questions). SUBMISSION TO THE VICTORIAN BUSHFIRES ROYAL COMMISSION

An alternative set of rules needs to be developed for these scenarios, in terms of identification, which are simpler so that customers can be easily identified. This then helps in having payments made into accounts from insurers or other sources (for example government) and allows for funds to be transferred between accounts and banks.

In design, delays with credits because of weekend payment system processes needs to be considered to alleviate system delays for the last point.

Importantly, the transactional total value could be capped at say $10,000 per customer, with some tiered additional payments, based on decreasing level of risk. SUBMISSION TO THE VICTORIAN BUSHFIRES ROYAL COMMISSION

Section 2 - Affordability of Insurance/Non Insurance/Under Insurance

Current Research - Affordability

There has been research in this area over the last 10 years. The lnsurance Council of Australia released its report The Non-Insured: Who, Why and Trends in 2008. NRMA also released a study in 2001 -Home and Motor Vehicle lnsurance: A Survey of Australian ~ouseholds'and the ANZ released its research report -A Repai? an Financial Exclusion in Australia in 2004' Findings are similar. The following summarises the information that the Suncorp Group has used to examine the issue of affordability and try to find solutions.

Brotherhood of St Laurence

In 2006 (following on from the Canberra Bush Fires and concerns with underfnon insurance) AAMI, Apia and the Brotherhood of St Laurence conducted some research into "Access to General lnsurance for People on Low ln~omes"~.

The paper looked at those who were not insured. Non insureds in this study did not include Home Building insurance - but did include contents, car, funeral or income protection insurance.

80% of those who the Brotherhood of St Laurence surveyed were Centrelink recipients - therefore it was assumed they were on a low income.

45% of respondents had some kind of home contents or car insurance. Patterns of insurance among the survey respondents suggested that being on a low income is not the only indicator for a lack of insurance. Public tenants, people experiencing financial difficulties, younger people, people with few assets and single people were more likely to be uninsured than others in the sample. Please note the rate of non insurance was higher in the group that the Brotherhood researched in comparison to the lnsurance Council of Australia study4andwhich looked at a larger, more evenly spread demographic (23%).

The research then went onto look at why people are uninsured. The key reasons given are as follows.

Affordability-This was seen as the principal reason. The research showed the following.

People on low incomes make a rational decision not to obtain comprehensive car insurance or home contents insurance having regard to the value of assets, their beliefs about what they would do if they lost their assets and their willingness to accept risk.

Many consumers do not shop around for insurance much or at all.

http://www.iag.com.au/news/gov~submissions/docs/20010611a.pdf ANZ 2004 -A Report on Financial Exclusion in Australia %ttp://www.bsl.org.au/pdfs/risk~&~rea~ity~insurance~report.pdf http://~~~.in~~rancec0uncil.com.au/PortaIs/24/lssues/The%20Non%201nsured%20-%2OReport.pdf SUBMISSION TO THE VICTORIAN BUSHFIRES ROYAL COMMISSION

Many uninsured people would prefer to be insured, but are unable or unwilling to pay the required insurance premiums.

Other reasons why consumers do not purchase insurance - the following is a summary.

There was some distrust of insurance companies and feeling of not being a respected customer.

Actual or perceived security requirements are a barrier to obtaining home contents insurance.

Assets were undervalued -the consequence of loss was not understood.

Overconfidence about risk of loss.

A perception that credit checks or a lack of a no claims bonus earned from previous insurance history was a barrier to obtaining insurance.

A mismatch between people's insurance needs and the insurance policies available.

Lack of understanding of insurance products (for example the concept of excesses and risk sharing).

The consequences of this research led to the following recommendations in relation to affordability.

The insurance industry needed to address the issue of affordability by creating and marketing a no frills insurance product which allowed incremental payments.

Provide an appropriate level of cover for people with limited household assets.

Provide more options on the payment of an excess.

Look at providing some kind of disaster cover (i.e. only payable if loss is over a certain amount).

Please see page 27 5in relation to other recommendations made, for example, communication programs to promote insurance to low income earners, working with the Insurance Council of Australia and ASIC to improve knowledge levels in the community etc. SUBMISSIONTOTHE VICTORIAN BUSHFIRES ROYALCOMMISSION

Industry Response - Smcorp Group

Affordability - Product Innovation In response to the affordability issue the Suncorp brands have produced various initiatives to try and counteract it. The following provides a summary.

AAMI Renters lnsurance - no frills contents policy, with a maximum cover of $25,000 for general contents. The average annual premium charged for this policy in 2008 was $178. This policy was deliberately designed in response to the above research to give renters an affordable insurance policy which recognised that not everyone has more than $25,000 worth of assets. This policy can be paid for by the month rather than in total if the customer so wishes.

Apia -comprehensive motor insurance policy -limited mileage to recognise that pensioners often do not drive a great deal (i.e. mileage is limited to say less than 10,000 km pa), which has helped reduce thecostof the comprehensive motor insurance policy for those eligible for Apia products.

Pay-by-the month (Apia no fee, Shannons no fee, AAMI minimal fee, GIO/Sun minimal fee etc.) to allow consumers to manage their money more easily, in line with their received Income.

Varying excesses (known as Flexi-Premium by AAMI) - the Suncorp Group offervarying excesses which allows the consumer to markedly reduce their premium in exchange for a higher excess, as the insurable risk is being shared between the insurer and the individual. Excesses vary from $0 - $5,000 dependingon the brand.

Under Insmanee

The other big issue to arise from Black Saturday has been under insurance. This has emerged as a bigger issue for insurers than non insurance. According to the latest Insurance Council of Australia figures, only 23% of the affected population had no insurance, compared to a large amount of under insurance.

The following describes the levels in the Suncorp brands of under insurance which have been ascertained since Black Saturday in the postcodes affected. Please note this is only for total losses.

GI0 saw underinsurance of 56%, Suncorp a similar amount. AAMI saw the estimated full rebuilding cost "50% higher than the held estimated cost of replacement (as Complete Replacement cover) and closer to 80%-90% for those policies with nominated sums insured. APIA saw under insurance of 74%. SUBMISSION TO THE VICTORIAN BUSHFIRES ROYALCOMMISSION

Please note that underinsurance in this instance means that the estimoted full rebuilding cost of the prapelty (and associated outbuildings) is higher than the nominated sum insured. This sum may vary as claims mature and more is understood about re-building costs. Ground clearance costs, additional living expenses are not included in this comparison.

Summary: all the brands had sums insured [estimated rebuilding costs materially below the actual (still unknown to a degree) rebuilding cost of the total property from the bushfires.

As you can see, the amounts vary according to brand and type of building policy held by the policy holder; however the overall message is clear. For building, those who were insured (other than AAMI~with Complete Replacement Cover) were substantially under insured.

The main drivers for under insurance were identified as being:

Due to the amount of the sum insured which the insured choose to purchase, only the main property was insured, i.e. the home. This has meant that a large number of water tanks, sheds and fencing were either under insured or not insured. Anecdotal feedback from the businesses indicates that this was at times known to the insured. There appears to have been an assumption that it was unlikely for them to lose everything, i.e. they were self insuringa significant part of their risk.

Insureds not updating policies as changes were made (e.g. in terms of contents, the insured sum was not upgraded on the purchase of a new item, for example a plasma television).

Revision of building codes which will push up the cost of rebuild

Excessive demand on the building industry which will temporarily push up building costs, which in turn exacerbates the issue of under insurance.

The industry has been aware of this issue for some time. Following the Canberra Bushfires, the issue of under insurance was highlighted. ASIC conducted some research in this area and released a paper -Getting Home Insurance ~ight'whichexamined this issue and made some recommendations.

ASICfound that there was chronic under insurance in Australia -they estimated it to be somewhere between 27% and 81% of consumers were underinsured by more than 10%.

Reasons identified for this under insurance included the following.

Standard homebuilding policies in Australia place the burden of estimating rebuilding costs on the consumer.

Due to its Complete Replacement Cover Home Building product - please see later for details 7 SUBMISSION TO THE VICTORIAN BUSHFIRES ROYAL COMMISSION

Consumers place great reliance on their insurer for help in estimating rebuilding costs. However (at the time of writing - most insurers offer Reeds Calculators on line now) only a small number of insurers provide consumers with access to reliable or comprehensive tools for estimating costs of rebuild.

Consumers and insurers may not increase the sum insured over time to keep pace with changes in building costs (with the assumption that the start point was accurate).

Difficult for consumers to compare home building policies which may exacerbate the issue.

Consumers make a deliberate choice to self insure part of their risk -via under insurance.

The Suncorp Group took the information provided by ASIC and their recommendations and made the following changes to their processfpolicies to address the issues identified.

All brands increase sum insureds every year in line with CPI, for insureds on renewal. Additionally sums insured for new policies have been checked against the Reed Building Cost expert calculator - to ensure insured amount is within 90% of Reed's value.

All brands provide comprehensive calculators on line to help consumers understand what their rebuild costs might be. A recent exercise internally also showed that as long as the same information was put into the calculators, estimated rebuilding costs were very similar (which has addressed one of ASIC's key concerns in 2005).

GI0 introduced a Safety Net of +25 - 30% built into the home building policy which customers can use to top up their home sum insured if it falls short of the real rebuilding cost at the time of a claim. This cover is designed to assist with surges in building costs that usually arise after a big event. It is an automatic cover under GlO's Home policies (GI0 Platinum and GI0 Classic). Under Suncorp's policy it is an option that costs less than increasing the sum insured by the same amount. At the same time, sums insured were increased well above CPI to try to ensure cover is adequate.

In 2006 AAMl introduced Complete Replacement Cover, where a customer is insured for the complete replacement, regardless of cost of their home. That has meant the total losses of home buildings resulting from Black Saturday, are 100% covered. From an insured's perspective they will receive a complete rebuild to the standard the housefproperty was prior to the event regardless of the cost, or an equivalent cash settlement if that is what they choose. This product offering is still relatively unique in the Australian market and its value has been realised during the last few months by many customers.

Other Brands have sent material to insureds at renewal time to encourage them to think about under insurance. Sadly our experience from Black Saturday indicates that consumers are still under insuring. SUBMISSION TO THE VICTORIAN BUSHFIRES ROYAL COMMISSION

In conclusion -following the learnings from the Canberra Bush fires the Suncorp insurance brands have all worked to address the issues of non and under insurance. Consumers are now given many choices of cover levels and methods of reducing their premiums. The Suncorp Group has responded proactively to the issues and continues to look for innovative ways of encouraging consumers to obtain adequate insurance at an affordable price.

The following section of this paper looks at recent consumer behaviour regarding price and how consumers are deliberately using price reduction options available from our brands to reduce premiumsfease up cash flow. It then goes onto examine the potential effects this will have on gross written premium and importantly for the Victorian Government, Fire Services Levy. Additionally it examines the Fire Services Levy collection process and looks at more equitable and broader ways of collecting this levy and extending collection to finance the CFA more fully and sustainably. SUBMlSSlON TO THE VICTORIAN BUSHFIRES ROYAL COMMISSION

Section 3: Behavioural Economics of Under and Non Insurance in Bushfire Affected Areas - Observations from Price Demand Analysis of Insurance Uptake in Risk Prone Areas

Level of under insurance and pricing implications for total loss and replacement policies

Estimates provided by the Insurance Council of Australia indicate that of the 2,029 homes destroyed in the Black Saturday Fires, 27.6% were not insureds. Furtherestimatesof under insurance vary. However, it is reasonable to estimate that the level of under insurance nationally, where the insurance cover either for the rebuilding of damaged premises or replacement of household contents is inadequate to cover the loss, is of the order of 34%'.

The dual issuesof non insurance and under insurance are perennial and regrettably usually only raised in the public consciousness and debate when there is a significant catastrophe such as Black Saturday.

As previously discussed, there have been a number of studies which have attempted to determine the reasons and behavioural drivers behind these market phenomena, most notable among these are the ASlCsurvey conducted following the Canberra bushfires of 2003 and the study conducted by the Brotherhood of St Laurence 2005. As explained in the previous section of this submission both these studies identified a range of factors which contribute to the lack of insurance cover. In brief the most common causes of under and non insurance were:

lack of dfordability of insurance;

0 lack of knowledge and understandlngof insurance products and features;

0 access to insurance products and means of accurately calculating required cover; and

deliberate choice not to insurefself lnsurefora combination of both.

These reports stimulated a range of activity and innovation in the insurance market by various insurers which included:

the launch of new products such as AAMl Complete Replacement Cover (home building);

Sun/ GI0 Safety Net Home Building policy upgrade: and

AAMl Renters Contents policy.

Additionally insurers upgraded their rebuildingcost calculators to improve access, useability and accuracy.

http://www.asic.aou.au/asic~pdflib.nsf/Lo~kupB~FileName/underlnsurance report.~df/Sfiie/underinsurance report.pdf page 12 SUBMISSION TO THE VICTORIAN BUSHFIRES ROYALCOMMISSION

Yet despite these significant innovations and upgrades, the events of recent bushfires in Victoria demonstrated a continuing high incidence of inadequate insurance cover.

The Suncorp Personal lnsurance Lines Group has undertaken an in-depth analysis of the economic determinants that potentially contribute to some of the reasoning consumers undergo when deciding to effect insurance and at what level of cover. The AAMl portfolio is uniquely placed to be able to undertake such an analysis to test hypotheses around the behavioural economics that underlie the dual phenomena of under and non insurance.

Characteristics of the AAMl insurance portfolio that facilitate the analysis which is unique to this brand are;

a large market share both in the affected regions and nationally in home building, contents and motor insurance markets;

product offerings (e.g. AAMl Flexi Premium) that allow for tracking of purchasing patterns over an extended period, which demonstrate consumer propensity to accept higher levels of risk for the trade off of lower premiums;

adoption of the AAMl Complete Replacement Cover product which provides for the rebuilding of total loss premises regardless of cost -eliminating the onus on consumers tovalue their property and update the value on renewal; and

AAMl enables Pay By The Month (PBTM) which helps insureds manage their payments over a 6 or 12 month period.

Added to these factors is the post event analysis undertaken by the Suncorp Personal lnsurance Lines Group, into the level of customer driven under insurance and differences in actual versus estimated values that are a function of underwriting.

Combined, these analyses provide insight to the decision making and choice behaviours of consumers, which have a significant impact on the level of non and under insurance.

The Analysis

The out workings of the analysis demonstrate some classic characteristics of behavioural economics, where purchasing decisions occur on the face of it, as a consequence of a not strictly rational analysis (e.g. failing to insure in high bush fire prone regions) and market inefficiencies, particularly in pricing, where the burden of risk is inequitably distributed. These factors cause distortions in markets and consumer purchasing behaviour.

What is clear from this analysis is that by their actions and decisions over time consumers have demonstrated a capacity to manage cost and affordability of insurance through the only mechanisms that are available to them including:

1. no insurance which means they bear the full burden of risk; SUBMISSION TO THE VICTORIAN BUSHFIRES ROYALCOMMISSION

2. to take some insurance but not manage the adequacy of the cover -accepting a level of under insurance to restrain premium costs;

3. to accept a higher excess level thereby reducing premium costs and accepting a higher level of risk retention;

4. to opt for 'pay by the month' instalments.

The following data analysis demonstrates how each of these factors have shown a pattern of growth as the overall costs of insurance have increased to accommodate changing risk profiles, inflation and the increasing impact of levies and taxes.

The Cost ofInsurance In Victoria, the cost to consumers of home building and contents insurance is made up of four main components:

1. Base premium which reflects the assessed risk (which the insurer charges).

2. Fire Services Levy (FSL) -collected prospectively as a percentage of the base premium to cover the required contribution of 77.5% of the funding for the CFA or 75% for the MFB by all insurers.

3. State Government Stamp Duty.

4. Goods and Services Tax (GST).

The combination of all these elements makes up the total cost to the consumer of a home building and/or a contents policy.

To demonstrate the impact of these components on the cost of insurance to the consumer, the following table shows the breakdown of the revenue collected by the AAMI brand for their Home Building (CRC) policy in metropolitan and regional Victoria for the 2008 year.

2008 Building only Metro % of Regional % of Premium Melbourne ($m) Premium Victoria ($m) Base Premium

Fire Services Levy 5.91 13.47 7.30 15.92

GST 3.62 8.25 3.95 8.62 Stamp Duty 3.98 9.07 4.35 9.49

Please note that metro and regional above are based on the MFB/CFA postcodes for Victoria.

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When calculated as a percentage of the total cost to the consumer these duties, taxes and levies account for some 31% of the total AAMl insurance revenues in the metropolitan region and 34% in regional areas, of which the FSL alone accounts for 13.5% and 15.9% respectively. The impost on the consumer is further exacerbated by the manner in which these charges are levied, with a compounding effect of taxes being charged on duties and levies.

Expressed another way, the average base premium for an AAMl Home building policy in Victoria in 2008 of $210.18 was then inflated by the application of these charges to a total cost to the insured of $308.OSrepresenting an increase to the base risk premium of approximately 47%. The impact of these charges has implications for the long term affordability of insurance, its uptake and the level of risk borne by the community.

As discussed earlier, research has indicated that a key barrier to the uptake of insurance and consumers effecting adequate insurance cover is the cost or affordability of insurance. Consumers have at their disposal, a variety of market mechanisms to manage the costs of insurance. These range from not taking any insurance at all to accepting higher levels of risk through under insurance, adoption of higher excess levels to reduce premiums and selection of cheaper distribution channels and pay by the month options.

Analysis undertaken by AAMI into the selection of these options by consumers demonstrates the decision process and choice options that consumers engage in when purchasing insurance, including managing the cost.

Chasnel SeIectioa The increasing trend for consumers to actively select the distribution channel (electronic, telephone or in person), that best fits their preferred method of interacting with suppliers, isevident from the movement towards using the internet.

Comparing the number of insurance enquires between internet and non internet channels, the level of enquires through non internet channels decreased by 14% (from 2007 to 2008) while enquiries through the internet grew by 55%.

In addition to the convenience of the internet as a distribution channel, one of its primary attractions to consumers is that most insurers offer considerable premium discounts (10%)for using it to purchase a policy. This indicates that this dramatic move to the internet is at least partially due to consumers seeking to manage the costs of insurance, through using a cheaper distribution channel. Additionally this can be seen via the recent growth and success of on-line insurers, for example, InsureMyRide or Budget Direct.

Hwer Excess A further example of consumers utilising the available mechanisms for managing the affordability of insurance, is the growing popularity of flexible excess options. AAMl (as do all of the Personal Lines Insurers in the Suncorp Group) offers considerable reductions to the base premium for varying levels of increased excess above the standard. In effect, a consumer can opt to take on more of the risk by SUBMISSION TO THE VICTORIAN BUSHFIRES ROYALCOMMISSION

accepting a higher excess, which in turn reduces their premiums. An AAMI customer for a Home Building policy for example, can opt to take an increased excess (up to $1,000) and the resulting reduction in their premium (50%).

Comparing the level of consumer enquiry on non internet channels for Home Building policies, in regional Victoria, in 2007 23.4% of enquiries were for policies with a higher excess - this had grown to 35.5% in 2008. A similar pattern was evident in Metropolitan areas where in 2007 24.7% of enquiries were for policies with a higher excess - growing to 36.2% in 2008. Importantly, conversion rates from enquires to purchase were at the highest for maximum excesses where premium levels were halved. These trends were even more evident on the internet channel.

This shows that consumers are actively managing the cost of insurance through the adoption of flexible excess options that reduce the premium costs but increase self insurance.

Pay by the &%nth The Pay by the Month (PBTM) option offered by insurers provides a method for managing the impact on the family budget of insurance premiums. Insurers vary in their approach to monthly premiums, some charging an increase in the overall premium while others do not charge an additional cost.

Looking at AAMI statistics (for consistency) over a number of years, it is apparent that customers are increasingly opting for pay by the month (PTBM) as a way of managing their cash flow. Concentrating on Home Building Insurance, in 2006 11.11%of new business risks were PTBM. In 2007 this had grown to 17.89% and by 2008,19.29%. A similar pattern is evident with those customers renewing their policies. In 2006 the proportion of renewal risks optingfor PTBM was 9.36%, growing to 11.15% in 2007 and 13.59% in 2008. This is despite the factthat AAMI charges an additional amount for PTBM customers to help cover the additional financing (due to loss of investment income) and administration costs.

Again this shows an evident trend of consumers managing the impact of insurance costs on the family budget, in this instance through spreading the costs over a 12 month period.

Selective Risk Cover (Building vs. Contents) A further observation from the risks in force data for AAMI in metropolitan versus regional areas of Victoria is the noticeably lower level of contents insurance in regional areasversus the level of building insurance. Customers in regional areas are significantly less likely to have contents insurance than they are building insurance whereas the inverse is thecase for metropolitan customers. One inference that can be taken from this is thatcustomers in regional areas are selecting the risks they are prepared or able to fund -the home being their primary asset. This becomes the priority to protect. This affordability issue is driving consumers to prioritise their risk cover in regional areas. SUBMISSION TO THE VICTORIAN BUSHFIRES ROYALCOMMISSION

Conclusions The above analysis has attempted to illustrate that consumers are increasingly seeking to manage the costs of insurance in a variety of ways that are available to them in the market place. It has also been argued and backed by research that the major barrier to the adoption of insurance (either home building or contents) is the affordability of the policies on offer. It has been further demonstrated that a considerable impost on affordability, is the current regime in Victoria of government charges, levies and duties which are furthercompounded by the GST. Depending on where you live in Victoria these charges can increase the cost of premiums by over 40%. Please note that this figure is higher again for business insurance, which is estimated to be as high as 80% by the Insurance Council of Australia.

It is evident from the data provided that customers are availing themselves of any and every mechanism to reduce the cost of insurance. The imposition of the FSL, stamp duties and GST must bear close examination in terms of their impact on affordability, adoption rates and overall efficiency and inequity as a revenue raising and funding mechanism. If the affordability is indeed a key driver to the adoption of insurance and to adequate insurance coverage, continuing application of taxes, charges and levies will inevitably lead to a shrinkingof the base of individuals willing to pay the price of adequate insurance. This in turn will mean the current system as a means of raising revenues to fund the CFA and other government programs will become increasingly inefficient as the inequity of this approach becomes ever more apparent and burdensome on the insuring consumer.

Recommandati~n 1. The Victorian State Government should adopt a more equitable and efficient means of raising the required revenues to fund the CFAfMFB and potentially other emergency services assisting the entire community. An established mechanism that shares the burden and cost of the risks more equitably is through a levy on rate payers to be collected through local council rates. Adopting this approach would simultaneously reduce the cost of insurance thereby ameroliating the moral hazard exposure to government and widening the revenue base to those who own and should accept the community responsibility of protecting their property.