Disaster insurance premiums becoming unaffordable as floods and bushfires increase
Disaster insurance premiums becoming unaffordable as floods and bushfires increase
11 February 2013
published by www.abc.net.au
Australia — This summer, for the second time in two years, Alan and Judy Barralet, from the Ipswich suburb of Barellan Point, packed up as many of their household goods as possible and nervously waited for the nearby Bremer River to reach its flood peak.
The muddy waters didnt reach their property this time, unlike 2011.
Our home had two metres in the lower level and a metre in the top level, Mrs Barralet says.
The family was insured, but two years later that cover is coming at a much greater cost. A couple of months ago their premiums jumped almost 400 per cent, from $1400 to $6132. They tried shopping around, but found the same rates were applied by other insurers.
Some insurance companies wouldnt give us the light of day and then even through the insurance brokers we found out that our home insurance premiums were roughly the same, Mrs Barralet said.
Eventually the Barralets managed to negotiate with their insurer for a reduced premium of $4300, but the rising rates are still worrying for locals.
In certain areas I think people just will not be able to afford the insurance at all, Mrs Barralet says.
To date this year, following a season of bushfires and floods, more than 65,000 insurance claims have been lodged, with insurance losses conservatively estimated at $674 million. The majority of those are in Queensland, with insurance claims from floods tipping the half-a-billion dollar mark. But those figures dont show the full picture, with many households and businesses in high risk areas now uninsured because premiums are just too high.
The Natural Disaster Insurance Review (NDIR), ordered by the federal government after the 2011 floods, recommended a government-backed reinsurance facility to address this issue.
Bill Shorten, Minister for Workplace Relations, Financial Services and Superannuation, spoke with RN Breakfast this morning and said the government is ‘considering the idea, although there are concerns about any re-insurance facility creating market distortions.
‘In some places, if people live in flood zones, whilst we want to see if the insurance companies are exploiting this, sometimes its not possible to just tell the market that you… if you live in a particularly risky area that we can ignore the risk, Mr Shorten says. Having said that, we are working on it.
One of the nations leading insurers, Allianz, says its average annual premium with flood cover in Queensland is $8200, but it can be as high as $19,000. In New South Wales, the average flood cover premium is $4704, reaching $24,000 in some cases. About 7 per cent of Australians live in areas with some flood risk. Allianz says 98 per cent of its New South Wales customers with a risk of flood of up to one in 49 years have opted out of cover. In Queensland, its 95 per cent.
Michael Sherris, professor of actuarial studies at the University of New South Wales, says that with the increasing prevalence of major bushfires and flood disasters, premiums are set to continue to rise.
‘A lot of these premium increases, apart from being driven by a better recognition of risk, theyre also driven to a large extent off the international reinsurance market, he says. When these insurers go to get their catastrophe coverage, they get increases in their reinsurance premiums because of international issues. And thats going to happen again and that will mean some increase in premiums.’
John Berrill, head of Maurice Blackburns insurance litigation practice and also a panel member of the NDIR, says an agency should be created to coordinate improved flood mapping, disaster mitigation measures, and a flood reinsurance facility supported by a funding guarantee from the commonwealth.
‘Insurance companies would still set the price for the premium, or the risk for the premium, and they would quote that to people and people would pay that, but with discounts built into it, Mr Berrill says. The money would go to the pool and then when a claim happened or a natural disaster happened, the pool would pay out the claims, to the extent to which theyre able, but the risk of higher levels of claims would be underwritten by the commonwealth government or through state governments, et cetera.
The insurance industry is concerned about market distortion. Independent federal MP, Nick Xenophon, is pushing for a senate inquiry into a federal natural disaster scheme. Hes pointed to a US scheme thats operated since 1968. But that US scheme is US$18 billion in debt. Professor Sherris says there are a number of models operating in other countries that Australia could look at.
Disaster insurance will be on the agenda of another senate inquiry, instigated by the Greens, which is examining extreme weather frequency and preparedness. Public hearings begin next week.
Greens leader, Christine Milne, says her party doesnt have a model for a disaster insurance scheme, but the issue needs to be addressed.
Im open to a national scheme. Im open to the discussion thats going to go on, she says. Im not going to commit to an outcome one way or the other, but what Im certainly committed to is increasing the national disaster resilience program which would go into those mitigation efforts. Insurance price equals risk. If you reduce risk, then you bring the premium down.
The Natural Disaster Insurance Review has also tied efforts to reduce premiums with improved mitigation. John Berrill says it cant be ignored.
Part of the government response to that has been to await the outcome of a climate change adaptation report, because they say that to assess the risk of what we can be up for, climate change is an important factor in that, he says. Now, my view is that thats a reasonable response. Its a big issue to be dealt with; I think the government is looking at it and, depending on the outcome of the election this year, the next government will have to deal with it. But its not going away.’
