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By Andrew Hall, Chief Executive, Insurance Council of Australia

In the post Budget period, as we watched the Northern Rivers again suffer a deluge of damaging rain, the Morrison Government passed legislation to create a publicly-funded reinsurance pool for cyclone and cyclone-related flood risk.

The recent and ongoing flooding across the eastern seaboard has prompted questions about whether it could be expanded to cover a wider range of natural disasters.

While ideas on these critical issues are many, we must make sure that any interventions are targeted towards the key issue – the growing impact of natural disasters across Australia.

Driving sustainable relief to people’s premiums will require long-term coordinated attention across a range of measures from all levels of government and across both sides of politics.

A government-backed reinsurance pool is not a silver bullet; it is just one lever available to influence premium prices in cyclone-impacted regions of Australia.

The key driver of insurance premiums in many areas of Australia is growing risks from extreme weather events. In 2021, Deloitte estimated the impact of extreme weather events to the Australian economy at $38 billion. Without investment in resilience and mitigation, these costs are estimated to hit $73 billion by 2060. The most recent report of the Intergovernmental Panel on Climate Change placed the problem in starker terms – an estimated a $92 billion impact to the Australian economy by 2050.

Including the current floods, since the Black Summer of 2019-20 there have been more than 720,000 disaster-related claims reported from 11 declared insurance catastrophes totalling more than $11 billion in insured losses.

These shocking statistics illustrate why a broader response is needed. Rising claims costs put upward pressure on reinsurance rates and, ultimately, the premium paid by the end consumer. This will happen whether the reinsurance pool is run by the private sector or by the government on a cost-neutral basis.

Questions around affordability require a clear-eyed discussion about whether we are prepared to transfer the true cost of risk from consumers and businesses in areas of higher risk to those in areas of lower risk across the country. Any intervention raises the question who will pay and what outcome will it deliver.

In assessing the effectiveness of government-backed reinsurance, we can turn to global examples. Many countries, including France, the United Kingdom, and the United States, already have such arrangements. The experience is clear. Without complementary risk mitigation measures, governments will ultimately be faced with the choice of raising reinsurance rates (and therefore consumer premiums) or diverting tax dollars to subsidising the pool.

Let’s look at the United States National Flood Insurance Program (NFIP). From 2004 to 2018, it borrowed $US39.4 billion from the federal government to pay out claims. In 2017, the US government cancelled $US16 billion of NFIP debt, to make it possible for the program to pay claims for hurricanes Harvey, Irma, and Maria.

Such an approach here would only exacerbate Australia’s existing problem of under-investment in resilience and mitigation measures. According to the Productivity Commission, 97% of all disaster funding in Australia is spent after a natural disaster with just 3% spent on measures prior to an event taking place.

We have also seen internationally that government-backed reinsurance can diminish the crucial risk signal that insurance provides to consumers. Over time, this encourages new developments in areas of high natural peril risk and rebuilding flood affected properties happens on a “like-forlike” basis. This is a poor outcome for all involved.

The Insurance Council’s policy platform Building a Resilient Australia outlines better options to protect homes and communities and put downward pressure on premiums.

These include a doubling of federal funding to $200 million a year in household retrofits and community protection projects, matched by the states and territories, better land use planning so no more homes are built in harm’s way, updating the national building code to include building resilience, and removing state taxes and charges on insurance, which discourage adequate cover by driving up the cost of premiums.

These are practical measures that address the problem at its source. They are also cheaper to implement and have the added benefit of actually protecting people from the impact of the disaster, not providing false comfort or, worse, incentives to do nothing about the risk in the first place.

Moreover, they build on our country’s experience of what works. The Queensland Household Resilience Program resulted in an average insurance premium reduction of 7.5%, with some reductions up to 25%. Likewise, the construction of a $15 million flood levee in Roma, Queensland in 2015 protected 483 homes and 75 businesses, reducing insurance premiums by an average of 34%.

Over the last few months, we are seeing the national dialogue shift, although there remains a disappointing level of actual investment. Both sides of politics proposed greater investment in resilience and mitigation. These include the establishment by the Coalition of the National Recovery and Resilience Agency, and Labor’s Prevent, Prepare, Rebuild plan which is more keenly focused on the mitigation challenge.

We have also welcomed the Government’s decision to more closely link the reinsurance pool proposal with resilience measures, following input from the Insurance Council and its members. For example, the pool will offer discounts for policies that have undertaken cyclone and flood mitigation. But in the lead up the election now just weeks away it is incumbent upon the Morrison Government to not only assist with recovery but announce further investments to better protect communities from the impacts of extreme weather.

A reinsurance pool by itself is not the solution, and a reinsurance pool will not protect people from the terrible impacts of flood, cyclone or bushfire.

If we want to get serious about this issue, and do it in a way that is financially responsible, we need to invest in measures to protect homes and communities, stop building houses in harm’s way, and regulate to make our built environment stronger into the future.