Australia has been plagued by unprecedented natural disasters in recent years. Natural disasters cost the Australian economy $18.2 billion annually, a figure that is expected to rise to $39 billion by 2050 due to climate change and urbanization into risk-prone areas. In response, insurance premiums have doubled in the last 10 years in high-risk areas like northern Australia, fostering underinsurance. 21% of Australians lack home and contents insurance, and policyholders’ sum insured often cannot cover disaster costs. Lack of insurance cuts communities’ ability to recover from disasters. With last month’s once-in-a 500-, 1000- or 3,500-year floods in New South Wales (depending on if you ask Scott Morrison, Dominic Perrottet or Barnaby Joyce respectively), governments’ role in natural disaster prevention and response is at the forefront of public conscience. As the severity and impacts of natural disasters intensify, state and local governments must cooperate to devise disaster risk mitigation measures, incentivize insurance uptake, and respond to disasters faster and more effectively.
In the Australian context, state governments are responsible for ‘life, property, and environment within their borders,’ each with their own approach to ‘respond to, and recover from, natural and human-caused emergencies.’ Currently, policy responses to natural disasters vary from generic government cash to region-specific curations, and from proactive to reactive measures. For instance, the existing federal government offers a one-off, no means-tested $1000 payment through the Australian Government Disaster Recovery Payment. However, reactionary handouts are often offered by states; in the recent floods, the NSW government offered additional $2000 support payments, and a Queensland-federal partnership announced a $741 million package to rebuild, raise, or sell homes.
Governments’ key role in disaster relief is to expand ex-ante resilience measures encouraging the facilitation of full insurance, then provide clear and comprehensive plans to the public. These actions ensure mitigated disaster risks are borne by insurers, while providing the acute help households require in the immediate aftermath. Together, communities can cope better with disasters now and into the future.
Ex-ante measures aim at reducing disaster risk. The recent royal commission into natural disasters divides disaster risk into three components: the natural hazard itself, the exposure of people and assets in hazard-prone areas, and the vulnerability of communities, assets, and systems to the impacts of natural disasters. Disaster risk is rising; natural hazards are becoming more intense and frequent from climate change. Further, exposure to natural hazards is heightening as the housing affordability crisis forces communities into cheap, disaster-prone areas or onto the fringes of cities where fires and flooding are generally more severe.
Therefore, governments must reduce the vulnerability of communities to natural disasters to curb and lower disaster risk. The federal government should collaborate with insurers to develop property risk-grading programmes to provide insurance policyholders risk-mitigation measures and associated savings. For example, to tackle high insurance premiums in Queensland’s cyclone-prone far north, the Household Resilience Programme (HRP) reduced insurance premiums by 8.21% and the cyclone component of the premium by up to 50%. Average grants of $10,370 allowed households to improve their property’s resilience to cyclones through roof replacements. A similarly prudent policy is included in the $741 million package, of which $100 million is allocated for a Resilient Household Raising Programme. Ex-ante localised funding generates a double dividend by investing in community-specific mitigation measures while saving society $6 for every dollar spent when disasters hit. Therefore, policymakers should prioritise risk-reduction. However, it is also estimated that for about every $10 spent on post-disaster recovery, only $1 is spent on mitigation. This provides local governments with a significant amount of scope to creatively devise community-specific risk-reduction measures.
Further, governments can improve risk awareness through investment in disaster modelling. Forecasting natural disasters is becoming increasingly difficult due to the more unpredictable climate. Better understandings inform individuals of the true risks when moving to risk-prone areas, and allows insurance premiums to accurately signal disaster risk, not climate uncertainty. Further, to disseminate the better-informed disaster risk and strengthen communities’ connections to emergency services during disasters, ex-ante investment in communication is essential. In the most recent flooding in NSW, thousands of people did not have access to 000 calls and over 60,000 people could not access NBN, exacerbating damage, casualties, and fatalities.
As mentioned before, lowering disaster risk reduces insurance premiums and encourages full insurance, solidifying the resilience of communities and allowing private enterprise to cover disaster risks, not the taxpayer. Governments must facilitate a competitive insurance market, whereby policyholders can easily compare policies to cover the appropriate disaster risk and select a sum insured equal to rebuilding costs. These ideals were far from achieved in the most recent floods; 65% of insurers consider floods and storms to be different events, resulting in policies payouts being refused. As insurance companies uses non-standardised definitions to describe natural events, households that miraculously managed to navigate the insurance market were often left with inadequate cash to replace what was lost. Federal standardisation of language would facilitate greater efficiency in insurance markets by helping consumers compare apples-to-apples and select policies offering sufficient cash to recoup rebuilding costs and adequate cover to relevant disaster risks that household wish to eliminate, informed by well-communicated local disaster risks.
If to insure, or not to insure, is the question, then the solution is much trickier. About 21% of Australians do not have any insurance. Interestingly, research has revealed non-insurance has a large social component; households are more likely to insure if people like them, including friends, family, and neighbours, are insured or expect them to be insured. In response, governments could devise media campaigns in high-risk areas to reduce non-insurance.
However, in the backdrop of affordability concerns and rising disaster risk, the economic impact of rising premiums in high-risk areas on households is certainly significant, discouraging insurance or fostering underinsurance. In the second part of this article, policymakers’ powers to pressure premiums and governments’ role after natural disasters occur is explored.