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.