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We need a better strategy

We need a better strategy

Average premiums for combined home and contents insurance in Australia, 2018–19

The floods affecting Australia’s eastern seaboard are a “1 in 1,000-year events”, according to New South Wales Premier Dominic Perrottet. But that’s not what science, or the insurance industry, suggests.

As extreme weather events become more frequent and severe in Australia, businesses and homeowners are seeing rising insurance costs.

Insurers consider future risks and have seen premiums rise sharply in the last decade. The Recent report from the Intergovernmental Panel on Climate Change, published this week, predicts global warming of 1.5℃ will lead to a Fourfold increaseNatural disasters.

Rising insurance premiums have created a crisis of Australian underinsurance.

The Australian Competition and Consumer Commission was commissioned by the federal government to examine insurance affordability in northern Australia. This is where floods and destructive storms are most common. The commission presented its findings. Final report2020. It found the average cost of home and contents insurance in northern Australia was almost double the rest of Australia – $2,500 compared with $1,400. The rate of non-insurance was almost double – 20% compared with 11%.

Average premiums for combined home and contents insurance, 2018–19

Average premiums for combined home and contents insurance in Australia, 2018–19

ACCC analysis of data from insurers., CC BY

While the areas now experiencing their worst flooding in recorded history aren’t part of the riskiest areas identified by the insurance inquiry, the dynamics are the same.

Financial ruin will result for those who aren’t insured or underinsured. Insurance premiums are expected to rise. As a consequence, insurance premiums will rise.

So what are you going to do?

Insurance affordability: How to tackle it

There are two main methods to reduce your insurance premiums.

One is to decrease global warming. This is not something Australia can do on its own, but it is a part of the solution.

Another option is to reduce the impact of extreme events by building more disaster-resistant structures or not rebuilding high-risk areas.

However, the federal government has placed most of its eggs in a new basket with a plan for subsidising northern Australian insurance premiums.

A sign of floods present and past in Chinderah, northern NSW, on March 1 2022

Signs of floods past and present in Chinderah (northern NSW) on March 1, 2022.
Jason O’Brien/AAP

This won’t do much for those affected by the current floods. It won’t even do much to solve the insurance crisis in northern Australia.

The reinsurance pool, a blunt instrument

The federal government has committed A$10 million to a new 2021 budget Reinsurance pool for flood and cyclone damage, “to ensure Australians in cyclone-prone areas have access to affordable insurance”. This pool was created by legislation Now, before parliament.

The government’s ostensible motive is to lower insurance costs by acting as a wholesaler in the reinsurance marketplace, where insurers insure themselves against the possibility of losing their insurance payouts.

The idea is that insurers will lower their premiums by offering discounted reinsurance.

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However, there is no guarantee that insurers will pass down their lower costs to customers. The pool’s benefits are not clear.

Its costs are also rising. The government effectively shifts risk from the insurers to its own, subsidizing insurance premiums in certain areas of the country from the public pocket.

The ACCC inquiry was very interested in the idea of a pool for reinsurance. Although there may be some benefits, the ACCC concluded that the risks outweigh any potential rewards.

We don’t believe that a reinsurance pool would be necessary to address the availability issues in northern Australia.

Targeting and mitigating

Beyond the problems mentioned, there are two important failures in the reinsurance plan.

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First, subsidising insurance companies doesn’t target help to those who need it most: low-income households.

Research is showing that natural disasters and how governments respond to them is increasing in number. Contributing to greater inequality.

The South Australian Council of Social Service explains in this a This week’s report, improving insurance access for people on low incomes at risk from natural disaster requires targeted support, such as promoting non-profit “mutual” insurance schemes.

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Second, only mitigation can reduce the cost of natural catastrophes. This can be done through public works such as building levees and stormwater systems upgrades, carrying out planned burns, and improving buildings like shuttering windows, strengthening garage doors, and managing vegetation around houses.

The ACCC’s insurance report identifies a range of ways mitigation strategies can be tied into insurance pricing. Yet none of these has been incorporated into the Morrison government’s response to the insurance crisis.

The federal government is the only one that supports the reinsurance pool. Reinsurance is not supported by the ACCC, the industry or community sector advocacy organizations.

A reinsurance pool for all of Australia?

The floods in Queensland and NSW have caused severe flooding. This will lead to an increase in insurance costs that will continue to drive more people from the insurance safety net.

We need to find better solutions for the insurance crisis than what is being offered in northern Australia. A reinsurance pool cannot be a national solution because it isn’t the solution for northern Australia.

There are no quick fixes, but there are clear maps that have been compiled from a wide range of inquiries and reports about insurance and climate vulnerability. The federal government must take climate vulnerability seriously and provide more than a blanket subsidy to the insurance industry.

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