By definition an embargo is an official ban on trade or other commercial activity.
What does that mean when applied to insurance? An Embargo is put in place when there is predicted sizeable events likely to take place in a certain area. The insurers will put a temporary embargo in place to halt all insurance related to covers regarding the said predicted event, often just for the area affected. For example - we currently have embargoes on flood cover because there are predictions of large scale flood warnings for the state of Queensland.
So what does that mean?
We will use the current flood embargo as an example to explain the concept of an embargo in insurance terms.
Across Queensland currently there are predictions that large scale heavy rain fall will result in moderate flooding in certain areas in Queensland. The BOM (Bureau of Meteorology) is run by the Australian Government to help monitor and predict storm events and insurers will use that knowledge to decide what areas are high risk of suffering a storm event. If an area is predicted to have higher risk of loss to the insurer they will take steps to reduce those risk for them selves and put an embargo on flood insurance for the areas likely to be worst affected. For them that means they will only have to deal with the risk already on their books.
Why is an embargo a good thing?
Protecting the insurers bottom line is not the only reason that an embargo is put in place. It is also there to protect premium prices for you as well. How you ask?? Well obviously when insurers lose money in these events they recoup costs with premium increases next year or upon renewal. If they have not collected enough premium pool base for the area because people are underinsured and chose to increase sums insured ONLY because there is risk of total loss due to flood event, it means they have not paid their full stare of premium to cover the actual sum of their risk. In turn this will increase the prices significantly for everyone else because insurers are trying to recoup money for more risk than they were aware of... and they definitely did not collect enough premium to cover that extra risk. So for you, the guy who pays the correct premium all year round, you would be disadvantaged by those not doing the right thing all year and only paying the right premium in the 11th hour. The embargo is to keep the insurance pool fair for all in it.
So what does that mean for you the policy holder?
It means that you can not increase the sum insured on your policy. So if an embargo is in place and you are concerned about not having enough money to rebuild your house should the flood cause a total loss, the embargo means you will not be able to increase the value you have your house insured for. There is also a possibility that you will not be able to change insurers during an embargo.
To take the worry out of insurance and the threat of an imposed embargo, be sure your sums insured are correct for the current market, Don't rely on valuations that are more than 3 years old. Your broker can help you or direct you to calculators. Click on the Contact us button and one of the Akupara Insurance Brokers will contact you.