Preventing an insurance disaster
As the flood response predictably shifts from compassion to culpability, nobody has worn the blame quite like the insurers. Indeed, responding to furious flood victims confused about how the damage is not covered in their insurance policies, Assistant Treasurer Bill Shorten has been loudly demanding that insurers clarify the definition of a flood or face government intervention. But as the bitter threats fly, some argue that the government has missed the underlying issues in pursuit of an easy, populist response. That’s the view of Strategic, an insurance and risk consultancy, which is calling for a government backstop for insurers who cover natural catastrophes, to keep insurance coverage affordable – and available at all.
The devastating floods in Queensland, NSW and Victoria come as a painful reminder of how difficult it is for insurers to viably cover a population as small as Australia’s, which is exposed to relatively more natural risk than other nations. Strategic points to research by Lloyd’s of London, which shows Australia represents 3 per cent of the world’s insurance premiums but 5 per cent of global claims. The solution, according to Strategic managing director Colin Smith, is for the government to step in with its own disaster insurance program for insurers, similar to a public scheme that already supports insurance against terrorism. In the wake of the 2001 terrorist attacks in New York, the price of terrorism protection skyrocketed for insurers, who began moving to cut terrorism coverage completely. In response, the government stepped in with the Terrorism Insurance Act (TIA), establishing a public fund that private insurers can access to cover losses from terrorist acts of up to $10 billion, for a premium. The fund ensures that insurers continue to cover terrorism, and also encourages consumers to take out protection by keeping rates lower.
If the government accepts that climate change is real and will increase the number of natural disasters, Smith says it needs to implement a comparable pool to deal with those events. The Queensland clean-up bill, which some say could top $20 billion, should be impetus enough. Under the Strategic proposal, the government would need to clearly define floods and other disasters – including bushfires, cyclones and earthquakes – and offer public re-insurance for insurers that cover those events. Those that don’t would be forced to print clear warnings on policy documents. Not only would this reinsurance pool remove the need for 'one off' government measures such as the currently proposed flood levy, it could speed up pay-outs and encourage the government to take a more proactive role in regulations for disaster prone regions because it would be disproportionately exposed to major claims. In the US, the TIA also shows that such a scheme could make money for the government, which is not required to return profits to shareholders as private insurers are. For every year there is no terrorist attack – the fund hasn’t had to pay out yet – the pool grows with the premiums, and could eventually become a kind of insurance Future Fund.
New Zealand’s public earthquake insurance program provides a similar successful example. The decades-old fund, which also covers damage from volcanoes, tsunamis, floods, and landslides, has increased significantly in the absence of major disasters. It has also kept the government from establishing its own public insurance company, which Smith says would be a disaster – evidenced by the poor track record of Australia's old state insurers, which have all been privatised. The pool would allow healthy private competition to continue, but with government support. The only thing holding a program like this back in Australia, Smith says, is government small-mindedness. It’s far easier to blame ‘heartless’ insurers than it is to address the fundamental issues. But as insurance costs rise and the public faces the prospect of insurers pulling out of flood insurance altogether, the government might soon find itself reconsidering its options.
