Flood challenge: HDI lifts lid on largest nat cat ever

Sydney-based Lloyd said it would be wrong to directly compare different nat cats. For example, he was involved in bushfire claims from Victoria’s deadly 2009 Black Saturday fires. However, the flood’s extensive area of impact and unrelenting duration, he said, made it unique. 

“The rain affected area covered over 1,000kms from north to south, which is significant,” said Lloyd, with a dash of understatement.

Flood challenges for claims teams

He said the floods presented “a whole suite of challenges” for every insurer involved.

“You were almost competing to engage the good loss adjusters early or get a hydrologist on site as quickly as possible,” said Lloyd. “It was almost a race to see who could get the materials for the temporary repairs the quickest.”

According to CRESTA’s latest industry loss index, known as CLIX, this east coast flood event produced the biggest losses anywhere in the world during 2022 outside the United States. CRESTA puts the losses at $6.76 billion.

However, at the time of the floods, Lloyd said one challenge for HDI in Australia, was convincing the head office back in Germany just how huge the floods actually were.

“We took a practical approach of superimposing a map of Germany (to scale) over the impacted area,” said Lloyd. The results of that exercise even surprised him.

“The rain band was 150km longer than the length of Germany at its furthest point,” said Lloyd. “Contextually, that brought some realism to the magnitude of the event.”

However, in terms of the number of claims, HDI wasn’t as impacted as other insurers.

“As an industrial insurer, we provide insurance predominantly to businesses and do not provide domestic/household insurance,” he said. “Having said this, our exposure was certainly not insignificant.”

Lloyd said some of his firm’s clients in the retail sector have stores in impacted cities and towns including Brisbane, Lismore, Toombul, Gympie and Rocklea.

“Because these insureds have large property programs with locations spanning the country, the losses were relatively small having regard to the size of respective programs,” he said.

Many businesses in flood zones can struggle to find affordable flood insurance but Lloyd said his firm’s commercial clients would have had flood cover but, for many, this cover would have been subject to sub limits or higher deductibles.

“It’s the nature of our business to support our clients during unexpected and often devastating loss but the catastrophe also highlighted the integral role of our underwriters in ensuring flood prone areas are appropriately accounted for when determining coverage terms,” he said.

Lloyd said as this flood event played out during February last year, HDI faced the same major hurdles as other insurers including accessing impacted areas and then getting in appropriate resources like loss adjusters and hydrologists.

“This became a challenge because insureds couldn’t calculate the damage in a timely fashion,” he said. “This resulted in delays in claims notifications and delays in assessing total exposures.”

According to Insurance Council of Australia (ICA) figures, updated in January this year, 22% of the claims from these floods are still outstanding.

“The availability of material for temporary repairs to make structures good and safe, in many cases, was very difficult to access,” said Lloyd.

There were other less obvious issues that also caused problems.

“You had cleaning companies, say in Lismore, who were in high demand and charged accordingly due to the demand and lack of alternatives,” he said.

Lloyd said responding quickly when workloads increased so quickly was a challenge.

“While we were appropriately resourced, an event of this magnitude was unpredictable and we needed to respond to our clients quicker than ever before, including with respect to interim payments,” he said.

The flooding also made it necessary to have difficult discussions with some clients.

“The catastrophe also brought difficult conversations like underinsurance to the forefront, as it became much more noticeable for some of our commercial clients, when the loss was sizeable,” said Lloyd.

He described the difficult considerations involved in settling claims as quickly as possible.

“With unresolved claims, you want to resolve the material damage claim early because that will circumvent the potential impact of any cost inflation, often from materials, but you don’t want to do it in a way that leaves an insured out of pocket,” said Lloyd.

He said there is also the need to find a balance between resolving the material damage claim early while simultaneously limiting the business interruption exposure.

“The challenges are trying to identify what those costs are going to be and then being able to get agreement with clients that this is a fair and reasonable settlement,” said Lloyd. “We’ve been able to do that in many cases.”

However, he said it can be quite hard to analyse the business interruption exposure because of the length of time required to get the premises back to proper order. For the insured, he said, there’s also the challenge of considering a cash settlement, because predicting the exact extent of a total loss can be very hard.

“This is especially the case when we’re seeing global inflationary pressures, and the extreme weather events have only continued contributing to cost increases,” said Lloyd.

Flood coverage for businesses is “largely available”

The issue of the availability and affordability of insurance, including flood cover, is a big industry issue, especially for residential customers. However, Lloyd said, when it comes to businesses, flood coverage is “largely available.”

“There are some insurers who strip out the cover all together but the option remains for sub limits or whether they take high deductibles to mitigate rate and premium increases,” he said. “There certainly appears to be greater pressure on clients to absorb some of the risks.”

Lloyd said given the new reality of more frequent nat cats, the challenge for insurers is to continue to improve their response even with the uncertainty around where and when the next event will occur.

“As they say in the military, every plan is perfect until the first point of engagement. Sometimes that’s how it feels for insurers,” he said.

Lloyd said adequate resourcing is key and insurers here do understand that, especially in relation to their claims departments.

“I think, in fairness to the whole industry, our success rate is extremely high and the ICA do a wonderful job in tracking the claims and settlements ratio over the subsequent months,” he said.

How would you describe your experience of Australia’s record flooding? What were your challenges? Please comment below.