Insurance inquiry reveals one of Australia’s greatest paradoxes

Wherever you look in politics lately, there seems to be the spectacle of politicians forcing businesspeople to sit in front of them, and the TV cameras, while the politicians yell at them. They could be bankers, or airline executives or Mark Zuckerberg: whatever the industry, whatever the details, the tone and the moves are always the same. How could you? Will you now apologise? How many lives must be ruined for the sake of your greed? Headlines are written, embarrassing exchanges are reproduced online and in the evening news, and then the businesspeople go back to making money.

I don’t mean to sound unduly dismissive. To some extent, this spectacle is exactly as it should be. The point of politics is to represent the interests of the people, as distinct from, say, the interests of business. Politicians should interrogate business when something is amiss, and the fact that you can feel the nation cheering the politicians on, willing them to get stuck in even more, only underscores the point that they are, at least in that moment, our representatives. This spectacle should not be all about catharsis, although catharsis matters nonetheless.

But implicit in all this is that the interests of business are not the same as the interests of the people. Or, to put it another way, it is simply not business’ job to act in the people’s interests. Sure, it might do so incidentally – by providing employment, paying tax or contributing to the economic health of the nation – but that is not its reason for being. Given the choice between the public interest and its private business interest, we’re not really entitled to expect business to prioritise the former. Not in a free-market system of government, anyway.

This week, it was the insurance industry’s turn to be skewered for its response to the 2022 floods in NSW and Queensland. The details were often truly galling. People still without homes years after the floodwaters had receded. People whose claims haven’t been processed, or people whose claims finally had been, but who nonetheless found the process completely soul-destroying. Hereabouts were stories of correspondence going unanswered for extended periods so as to delay any payouts, of callous interrogation of fragile people in devastation and shock, and some quite extraordinary attempts at corporate victim blaming. One woman whose house had been completely inundated told me her insurer tried to argue that since there was a tuft of grass in her guttering, this lack of maintenance might have exacerbated the water damage. She’s not even sure the tuft was there at the time of the flood.

It is easy to rage at such stories. Indeed, it’s harder not to. The mistreatment is so obvious that the very first thing the inquiry heard in person from anyone in the insurance industry – in this case from the Insurance Council CEO – was an apology. But the whole thing – the rage, the apologies, even the inquiry’s spectacle itself – takes on a different complexion when you remember even the most basic facts about insurance, roughly as follows: Insurance companies exist to make profit. They do this by collecting the highest premiums they can, and by paying out as little as they can. Their job, therefore, is to try as hard as possible to deny your claim. They employ expensive lawyers and armies of assessors to that end. Delay and complexity is part of their arsenal. Their every incentive is not to provide the service you think you’re getting.

If that seems a callous description, it’s only because their product is so often essential, and their customers correspondingly desperate. For that reason, we tend to want them to pay out every claim as quickly and generously as possible, especially in a major disaster such as a flood or fire, and we’re galled when they don’t. But of course, to do so would undermine their entire business model, leading in the long run either to truly astronomical premiums, or a largely uninsured world. Take the example of Hurricane Andrew in 1992 in Florida. So huge was the damage and so large the insurance claims that eleven insurance companies went bankrupt, while others just stopped issuing or renewing policies. The surviving companies jacked up their premiums and reduced their number of high-risk policies. The end result was a million homeowners who simply couldn’t find anyone to insure their homes.

We don’t tend to think about insurance this way because deep down we don’t instinctively see essential services as commercial ones. We see them as something more akin to a quasi-governmental function. That immediately leaves us with a paradox. We have this habit of outsourcing very important things to profit-seeking businesses, then complaining when they behave like profit-seeking businesses. And because important things tend to be expensive enterprises, like airlines or aged care or insurance, a high level of competition isn’t guaranteed. So we get the kind of thing we’re seeing in this parliamentary inquiry, unless the government regulation is very good, or the government is active in the relevant industry. The politicians’ rage obscures that in most cases, the businesses they’re lambasting are acting perfectly legally within rules those politicians have written.

Perhaps the most obvious, familiar contrast is in health. Private health insurance has its problems, but nothing so egregious as we’re seeing in the case of flooded homes. It also exists against a background of universal health care, in which people can always fall back on a comprehensive, if sometimes inferior service. Health insurers therefore have less leeway to let their customers down.