August 14, 2017 by Canadian Underwriter
Insurance Council of Australia (ICA) has welcomed a report by the Senate Economics References Committee supporting the council’s call for the federal government to invest in natural disaster mitigation and resilience, as well as back risk-based pricing.
This spring, ICA called on Australia’s federal government to invest at least AU$200 million annually into natural disaster mitigation and resilience measures, notes a council statement Friday.
“The government rejected a recommendation for an increase to AU$200 million a year in federal funding for mitigation and resilience, matched by the states and territories,” ICA reports.
Release of the Senate committee report follows an ICA update that Cyclone Debbie-related claims – stretching from far north Queensland to northern New South Wales – numbered just shy of 66,000 as of July 17 and amounted to more than AU$1.4 billion.
Debbie struck the Queensland coast near Airlie Beach at about noon on Mar. 28, 2017, as a category 4 severe tropical cyclone, notes the council update.
“Over the next seven days, storm and flood damage from the Cyclone Debbie system continued along the east coast with storm-related damage occurring as far south as the New South Wales/Victorian border,” the update adds.
Last November, the Senate referred matters relating to Australia’s general insurance industry to the Senate Economics References Committee for inquiry. The terms of reference for the inquiry included exploring the increase in the cost of home, strata and car insurance cover over the past decade in comparison to wage growth over the same period; legislative and other changes necessary to facilitate an independent home, strata and car insurance comparison service in Australia; and any related matters, which resulting in including natural disaster mitigation.
With regard to disaster mitigation funding, the committee report calls for the Australian government to “reconsider its response to the Productivity Commission’s (PC) inquiry on National Disaster Funding Arrangements.”
It further recommends that, “as a matter of urgency, the Australian Government work with states and territories through the Council of Australian Governments to reform national disaster funding arrangements.”
In the aftermath of the recent devastation caused by Cyclone Debbie, “the committee acknowledges that some disasters are unforeseen and their impacts unavoidable. However, in many cases the consequences of natural disasters can be mitigated,” the report emphasizes.
“Accordingly, the committee believes that there is an urgent need for governments at the Council of Australian Governments to address investment in targeted disaster mitigation,” the report notes. “Increased investment in well-designed mitigation by all governments should help reduce home and strata insurance premiums over the long term.”
ICA CEO Rob Whelan maintains that “investing at least $200 million a year in mitigation and resilience should be treated as nation-building that protects vulnerable communities for generations.”
Adequate insurance cover “is integral to protecting consumers’ most valuable assets and to maintaining and protecting the living standards of all Australians and the economy overall,” states the report.
“As seen in the wake of a number of natural catastrophes, unsuitable financial products, including insurance, can have significant and devastating impacts on people’s lives. To that end, accessibility, transparency, affordability and competition are crucially important features of a well-functioning general insurance market,” it points out.
“Events such as the global financial crisis and natural catastrophes like that recently seen with Cyclone Debbie emphasize the importance of a robust and sustainable insurance industry,” the report adds.
Recent increases in premiums for home and strata insurance “have largely been driven by the rising claims costs associated with increased incidence of natural catastrophes,” it points out. “Some industry stakeholders argued that investment in disaster mitigation is the only way to sustainably reduce insurance premiums over the long term.”
The report cites Whelan’s comments regarding natural disaster mitigation before the committee: “When mitigation does not exist or poor decisions remain about the design, floods have proved devastating. Insurers have to price to risk where these events occur and, where the risk is high, so too are the premiums. In some respects, insurance is the canary in the coal mine.”
Whelan further noted “premiums alert individuals and governments about high risk and low risk of living in certain areas. These signals should spur action in the form of mitigation and resilience measures and better town planning to prevent inappropriate development and improvements to building codes.”
Citing findings in PC’s final report to government, that 2015 report noted that while insurance markets in Australia for natural disaster risk are generally working well, and pricing is increasingly risk-reflective, “governments over-invest in post-disaster reconstruction and under-invest in mitigation that would limit the impact of natural disasters in the first place. As such, natural disaster costs have become a growing, unfunded liability for governments.”
In the ICA statement Friday, Whelan says the “report concluded insurance premiums appropriately reflected the level of risk.”