Do politicians have the guts for disaster insurance?
The massive losses from the floods that are impacting Queensland, New South Wales and Victoria has raised issues about the adequacy of insurance coverage, particularly flood coverage and the way such disasters should be funded.
There are many examples of disaster insurance arrangements that different countries have in place covering flood, earthquakes and other disasters.
In Australia a proposal for such a national disaster insurance scheme was developed in the 1970s following the Brisbane Floods and Cyclone Tracy - but it was never implemented.
A national disaster insurance scheme is exactly what the label says. It’s national and covers all Australians, individuals and small businesses.
Current insurance arrangements do not cover all Australians and where they do have insurance, it may not cover flood, a risk that was in the past regarded as uninsurable. It covers the disasters such as bushfires, hails storms, cyclones, floods that are classified as disasters.
This means the events that are severe and impact a large number of Australians producing significant economic and personal loss.
And it’s an insurance scheme, so there are premiums that vary by risk, with very low premiums for properties with low natural disaster risk and high premiums for those in risk-prone areas.
It both spreads the risks and costs across as wide a group of individuals as possible and it also funds these risks in advance of them occurring.
It would include incentives for risk mitigation, through lower premiums, and provide information to individuals and councils about the natural disaster risks.
It could be managed through current insurers or operated as a separate national scheme.
It would reduce insurance premiums since these natural disaster risks would be covered through the scheme and not the private insurance market where lack of insurance and underinsurance are major issues.
Insurance works best when it covers risks that do not all occur at the same time.
This averages the cost, leading to more efficient provision of insurance. This also happens at the international level where such extreme risks are reinsured.
Flood losses in Australia do not usually occur at the same time as hurricanes in the US, earthquakes in Japan or snowstorms in Europe.
This risk spreading of disasters leads to more effective and efficient pricing of insurance.
Insurers also access this market to manage their current exposure to these disaster risks, but individual insurance coverage is not always available or even purchased by all Australians.
The arguments in support of such a scheme are compelling. Risk sharing at a national level and prefunding substantial losses from these events are some of the benefits. However, there are major challenges to implementing such a scheme.
Politicians may have difficulty taking a common view to support such scheme. It requires the major political parties to work together along with state and local government.
The insurance industry would have to recognise the potential benefits that it will gain from such a scheme, especially if it were a collaborative scheme operated through existing insurance arrangements.
The only question that remains is whether or not we have the leadership and vision in the politicians and the insurance industry to develop and implement such a scheme.
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