Ombudsman’s report calls for action in addressing ‘national crisis’ in insurance coverage

The newly released Small Business Ombudsman’s Insurance Inquiry Report has called for urgent action to address what it describes as widespread market failure over the availability and affordability of insurance products for small businesses.

With operators across the leisure industry impacted by insurance companies reducing or removing coverage, introducing significant price hikes, and, in many instances refusing to renew coverage, the report makes 15 recommendations.

Releasing the report, Australian Small Business and Family Enterprise Ombudsman, Kate Carnell stated “we are in the grip of a national crisis that is killing small business

“As a result, far too many Australian small businesses are on the brink of collapse because they cannot secure a range of insurance products necessary for their operation.”\

“Public liability insurance has become almost impossible for small businesses to obtain, particularly those that offer recreational activities such as caravan parks, quad bike tours or jet boating to name a few.”

The inquiry, announced in July, received more than 800 responses to a survey and more than 20 submissions.

Recommendations 5 to 7 refer to the issues of getting public liability insurance, which is inhibiting development and the creation of jobs in leisure and tourism.

Recommendation 7 notes that “where there is only one or no insurers left in a professional indemnity market, the Federal Government should provide an insurance scheme of last resort for small business”.

Small businesses reported uncertainty over how much of a broker’s income came from insurer commissions, with some being “shocked at discovering” their broker had received conflicted remuneration.

The Report proposes conflicted remuneration should be banned with a phased transition period, while noting that a further governmental review is due to take place in 2022.

It states “given the importance of brokers to small business’ access to insurance, the conflicts involved, and the existing confusion over how brokers are paid, conflicted remuneration needs to be urgently addressed.”

Other recommendations call for statutory caps on liability for personal injury and the introduction of a no-fault National Injury Insurance Scheme, reforming fault-based arrangements that are leaving insurers and small businesses facing “uncontrollable risks”.

The Report proposes that the Australian Financial Complaints Authority’s remit be extended so it can cover more small businesses and adjudicate on disputes around products such as public liability and industrial special risks, and calls for industry codes of practices to be mandatory.

It all calls for insurance product documentation to set out the most common mitigations businesses can make to reduce premiums and ensure coverage, clearly list exclusions, set out common reasons why claims are denied, use standard definitions and, in the case of foreign insurers, be written in Australian legal terminology.

Response
Among industry operators, the Caravan Industry Association of Australia says many of its members are “against the ropes” following the bushfire season and COVID-19 travel restrictions and backs the proposed ARPC reforms and public liability cap.

Welcoming the report, Caravan Industry Association of Australia Chief Executive, Stuart Lamont stated “the Ombudsman’s acknowledgment of market failure and the need to provide certainty to small business operators is a welcomed and accurate summary of the current insurance sector.”

The Association advises that caravan park operators, who are fully regulated by relevant state and federal legislation regarding work health and safety, are not seeking to avoid their responsibility regarding public liability and natural disaster management. They are, however, seeking a consistent framework that ensures their significant investments and liability are able to be protected.

Lamont added “the recommendations by the Ombudsman are a step in the right direction to support the caravan park industry. Specifically, Expanding the Australian Reinsurance Pool to cover all-natural disasters and adopting statutory caps on public liability will provide ongoing confidence to operators that they will be able to find and be covered by adequate policy.”

The Insurance Council of Australia says the report identifies many important issues and recommends measures which are to be welcomed as part of the public policy debate.

National Insurance Brokers Association (NIBA) Chief Executive, Dallas Booth says the report reflects the current hard market and wider community discussions over challenging areas, but broker commissions are not the problem and there are clear obligations on them to avoid conflicts of interest.

Booth advised “brokers are working very hard to get cost-effective cover for their clients.

“We have not seen evidence of broker remuneration causing client detriment. If there is evidence of that, we are keen to see it, and we will identify the root cause and find ways to deal with it.”

Western Australia's Small Business Commissioner David Eaton wrote to the Ombudsman in July highlighting concerns about lack of access to insurance for small businesses who were struggling to recover from the impact of COVID-19.

Following the release of the Report, Western Australian Minister for Small Business and Minister for Tourism, Paul Papalia stated “small businesses need access to support from all areas to ensure their ongoing survival during and beyond the COVID recovery period.

"Access to quality and affordable public liability insurance is critical for small businesses in both Western Australia and across the nation.

"The Ombudsman's Insurance Inquiry Report makes strong recommendations for a national approach to resolve this issue that is threatening to severely affect small businesses all over Australia.”

Background
The Australian insurance market has been hardening for several years, as global insurers adapt their risk weightings to increasing threats. Climate change impacts mean that, increasingly, businesses in rural and regional areas are unable to secure against fires and floods, leaving businesses like country pubs and camping sites uninsured.

Rising levels of litigation has led to tourism businesses including horse riding, jet boating, amusement parks and show ride operators being seen as ‘too risky’ to cover while international disasters such as the Grenfell tower fire in London have changed insurer’s views of the building sector, leaving geotechnical engineers and certifiers unable to secure the insurance they need to maintain their licences and registrations.

Carnell concluded “there is market failure that will have extreme consequences for the Australian economy if left unaddressed.

“The recommendations in this report are designed to provide much needed clarity and certainty for small businesses, rebalance risks for insurers, and allow businesses access to the insurance products to protect themselves for when things go wrong.”

Click here to read the ASBFEO Insurance Inquiry Report December 2020.

Images: Kate Carnell (middle) and caravan park operators are “against the ropes” according to the Caravan Industry Association of Australia (below, credit: Brisbane Showgrounds).