In part 1, we discussed the importance of governments promoting risk-mitigation measures and regulation in the insurance market to reduce insurance premiums and to ease policyholders’ ability to select appropriate insurance coverage. However, these policies alone may not alleviate the most unaffordable insurance premiums in the most risk prone areas, if offered at all. Part 2 discusses policymakers’ role in pressuring premiums downwards in all high-risk areas, and governments’ response when disasters strike.
Households and businesses can only insure themselves if policies are affordable. Those that do not have insurance are often the lowest income, hence the least able to respond and recover from disasters. The naïve policymaker may be blinded by the benefits of subsidies as a strategy to reduce non-insurance and underinsurance; subsidies can target acute affordability issues by distributing cheques to poorer households. Subsidies are also superior to ex-post government-funded aid, as state assistance disincentivises insurance take-up through expectations of receiving cash from Canberra.
The devil is in the detail; subsidies reduce premiums but leave an unmitigated disaster as the increasing underlying disaster risks propelling premiums upwards are neglected while creating the illusion of risk-reduction. Subsidies distort the risk-signalling function of premiums to insurance markets, falsely indicating lower disaster risk – and potentially attracting residents to disaster-prone areas. The separation of risks from premiums ‘dull(s) the incentives to manage the risks,’ leaving properties’ exposure to underlying disaster risks unchanged. Beyond risk distortion, premium subsidies are costly and potentially ineffective. The Productivity Commission found insurance premium subsidies to be ‘overwhelmingly ineffective’ and expensive. For northern Australia, 50% premium reductions for 19,000 homes would cost $43 million annually, borne by lower-risk households. As subsides fail to curb growing underlying disaster risks, governments will be tied to providing rising levels of subsidies to increasingly-dependent recipients.
Tax reductions on insurance policies should be primarily promoted to pressure premiums downwards. The Emergency Services Levy (ESL), Stamp Duty, and the Goods and Service Tax (GST) adds 20% to premiums in most states and territories, topping out at 50% in NSW. State and territory governments should replace these taxes with broad-based taxes to create an insurance subsidy of sorts. In high-risk areas where insurance is not offered or impractically expensive, a reinsurance pool may encourage insurers to offer policies to existing residents. A federal-funded $10 billion reinsurance scheme is currently underway in Queensland. In such a scheme, the government effectively underwrites insurers’ risk. This policy should only be used in the most extreme cases where insurance is not at all offered, because benefits are passed directly to insurers then indirectly to policyholders, and taxpayers become potentially liable for billions. Further, this policy should not be available to new households after implementation, as high insurance premiums representing risk should discourage individuals from moving to high-risk areas.
However, when disasters do strike, state and federal governments must stick to predictable, consistent, and coordinated approaches to disaster management. Governments – at both the state and federal level – should communicate that when disasters manifest, no unplanned additional funding will be allocated. This would encourage full uptake of the now affordable and competitive insurance, as the expectation of ex-post governmental aid will be removed from the consumer decision-making process. This coordination between state and federal governments should shift disaster management towards Canberra. As natural hazards do not respect state boundaries, a nationalised ‘best practice’ would allow emergency response to be coordinated and resources shared. There was much criticism regarding not only the delayed deployment of the ADF to areas impacted by the NSW floods and people that needed emergency help during the disaster, but also in the immediate clean-up. Greater integration between federal and state governments may ease coordination of resources like the ADF to disaster-stricken areas. Predetermined criteria to automatically trigger the deployment of the military to disaster-stricken areas in a timely manner could alleviate pressure on papery politicians. Further, lawmakers may want to devise agencies specially crafted to respond to natural disasters.
Not only is it important that emergency services and the ADF are timely deployed to help communities when disasters strike, but the acute one-time $1000 disaster relief payment should be raised and reach households faster when disasters strike. A larger disaster relief payment will not substitute households taking out insurance policies, as cash in the order of thousands will not cover the liabilities in the hundreds of thousands, or even millions, that natural disasters inflict on households and businesses. The speed this money reaches households is critical; when disasters strike, families need money within hours for temporary accommodation, food, and fuel. In the recent floods in NSW, those payments were slow to get to recipients. Having greater pre-planned acute liquidity relief from households would quell the unrelenting urge for politicians to direct additional cash handouts to their favourite electorates on a partisan basis.
It is worth stressing that state-federal coordination in response to natural disasters differs from risk-mitigation and prevention of disasters and their impacts; states are best-fitted to implement localized funding and solutions to their unique natural hazards. Therefore, in the face of growing disaster risk, great integration amongst state and federal governments to produce clear responses to disasters while promoting risk-reduction policies and insurance market reforms will allow communities to be less affected and better recover when disasters strike.