Australia has an unprecedented opportunity to resolve issues of escalating insurance prices caused by an uncertain climate. The time has come to curb the trend towards increased economic exposure to natural catastrophes.
The recent change of government, the upcoming Australian G20 in Brisbane in 2014, the establishment of the Bushfire and Natural Hazards Research Centre and international support from APEC finance ministers all point towards support for research and action for disaster risk financing.
Disaster risk financing is defined as strategies and instruments used to manage the financial impact of disasters. Disaster risk financing can use mechanisms like budgetary reallocation, debt financing, increased taxation or international aid. Or there are ex ante mechanisms, such as government reserves, insurance, contingent credit or catastrophe-linked securities.
The impetus to develop this kind of financing in Australia has its basis in a number of reports outlining existing inadequacies, including the Victorian Royal Commission final report into the 2009 Black Saturday bushfires and the Natural Disaster Insurance Review in the wake of Queensland’s floods and and Cyclone Yasi. Subsequent reports have affirmed the need for insurance in Australia to be the “key instrument that supports any efforts to maximise national resilience”.
Research abounds concerning the need to implement preferable solutions to the increasing number of catastrophic events, particularly in relation to improving access and affordability of insurance products. Insurance can play a pivotal role in the financial component of disaster risk management, reducing the financial, fiscal and economic impact of disasters as well as promoting faster disaster recovery."...
From July this year, Victorian councils began collecting the fire services levy through property rates, rather than taxing insurance policies. Formerly the levy was funded by a tax on insurance companies and therefore passed on to the consumer in the pricing structure of their insurance policy.
The Victorian Treasury says current model is premised upon equity and removes flawed and unfair laws and mechanisms. The Insurance Council of Australia has endorsed the move, claiming it to be the “biggest tax reform since the introduction of the GST”.
The Australian summer has become synonymous with bushfire risk. Tasmania, New South Wales and Victoria have witnessed devastating bushfires generating millions of dollars of damage. Many individuals have experienced the heartache of having their property destroyed and Australia has also seen thousands of hectares of land transformed into blackened savannahs.
Now, as the flames start to subside and the blackened rubble remains, the problem with property losses becomes economic. The question that arises from individuals, governments and insurers is: Who is going to pay?
There a number of different options for dealing with property losses arising from catastrophic events. These options include individual responsibility, governmental assistance, insurance, ad hoc funding arrangements, catastrophic bonds, and specific purpose taxation levies etc. In Australia, insurance is the preferred economic protection measure to protect against losses to private properties. Ironically, there are widespread levels of underinsurance. Given the difficulty of determining who is underinsured — particularly when some people do not know this themselves — figures from academic literature vary slightly. The Australian Securities and Investment Commission has suggested that the number is anywhere between 27% to 81% of consumers. The cause of this underinsurance stems from a multitude of factors particularly the cornerstone issues of access and affordability.