The profile of general insurance for buildings and building practitioners in Australia is changing.

The intensity and frequency of natural disasters is increasing rapidly.

The dangers of combustible cladding and other high profile building failures, highlighted by the Lacrosse Apartment fire in Melbourne in 2014, have led to significant changes in the insurance landscape for the property, building and construction sectors.

These changes have come in two principal forms: challenges accessing professional indemnity insurance and the rising cost of general insurance for buildings.

Access to professional indemnity insurance

Professional indemnity insurance, particularly for building surveyors and specifiers of building products such as architects, building designers and engineers, has become increasingly expensive, and in some cases difficult to access. This is having a two-pronged effect.

Firstly, it can on occasion force out good people from an industry that needs them. The high cost of professional indemnity insurance has prompted some heading towards retirement to exit early.

Secondly, it has had the positive effect of influencing professional associations and regulators to improve the competencies and conduct of many in the building sector, such as the use of professional standards schemes and the registration of classes of practitioners.

The cost of general insurance

Next, the rising cost of general insurance for buildings has been exacerbated by the increasing intensity and frequency of extreme weather events. The resulting increase in insurance risk brings into question the long-term sustainability of providing cost-effective insurance in many locations.

The rising cost of insurance is not only impacting people in certain geographic areas but is spilling over to others in the community who are paying more to amortise the costs.

Insurers assess their risk exposure and adjust their premiums accordingly. Higher premiums also send the message that an insurer’s risk is too high, and that the government and market should respond with corrective action.

So, what corrective action can be taken to stem these challenges?

Where to go in the crossroad?

Governments are increasingly called upon to cover much of the remediation costs arising from extreme weather events. Over time, the appetite and capacity to do so may diminish as these events become more frequent and severe.

Unlike insurers, governments have the advantage of controlling built environment policy levers, in the form of land-use planning and building and material standards, that can contribute to improving the resilience of the built environment in the face of extreme weather events.

The application of revised land-use planning arrangements and building standards typically only applies to new buildings and new building works. This is important to note because, based on climate science, it is forecast that many homes constructed today will experience a significantly different climate in the future.

With this knowledge, our regulatory settings need to factor these future weather events into the consideration of where and how buildings are constructed today, together with other factors such as housing affordability.

Established buildings are already exposed to the increasing risks of extreme weather events and have or may be the subject of insurance re-evaluation. From a market perspective, this increased cost may incentivise remediation, land management, maintenance, or other actions to lessen risk.

On existing buildings, there are examples where governments at all levels have been working with the not-for-profit sector and insurance industry. In some cases, this involves the relocation of properties at risk or the undertaking of mitigation work. Of note is the recent collaboration with the Resilient Building Council (RBC).

The RBC, with funding support from the Federal Government, has developed a free-to-access Bushfire Resilience Rating Home Self-Assessment App, which enables homeowners to assess measures that can be applied to their existing building to help reduce the threat posed by bushfires.

Through this initiative, NRMA Insurance and Suncorp Group recently announced that they will provide discounts to homeowners who apply the rating tool to make their properties more resilient. The higher the rating achieved, the greater the discount on offer. According to the RBC, ‘This novel Australian science and technology has enabled insurers and banks to integrate household risk reduction into their pricing systems, which is a world-first.’

It is understood that the intention is to expand the tool to cover other extreme weather-related events. This rating tool could then be applied to new homes in the same way that energy efficiency ratings have been used for close to two decades. This can help to lift the level of resilience, reduce the cost of insurance, and educate the market.

This is one example, but it remains critical that governments, industry and insurers take a longer-term view to improve building resilience to ensure affordable access to both professional indemnity insurance and general insurance.

By Neil Savery, Managing Director, International Code Council Oceania

Neil is the Managing Director of International Code Council Oceania, part of the International Code Council (ICC), a global provider of building safety solutions, including model building codes and a suite of practical solutions for regulators, practitioners, and manufacturers involved in the building sector.

Prior to joining the ICC, Neil was the Chief Executive of the Australian Building Codes Board and has previously led planning and regulatory bodies for a number of states and territories. He has also served as the President of the Planning Institute of Australia.

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