NATURAL disasters are becoming more frequent and Australian households are paying the price through higher insurance premiums.
That's created a political problem the federal government is struggling to resolve.
The past four years have seen the Black Saturday bushfires in Victoria in 2009, the Queensland floods and cyclones in 2010/11, and now more fires causing havoc across Tasmania and NSW.
As stated in the 2011 Natural Disaster Insurance Review, a range of research suggests the number and severity of extreme weather events in Australia is only set to rise, costing $1 billion a year on average.
As the risk rises, so do insurance premiums, which turns attention to whether a national disaster insurance scheme is warranted.
Jim Murphy, Treasury's markets group executive director, said in March last year a review had raised the question of whether the government should play a long-term role to help the community insure against floods.
"Particularly those households facing significant increases in insurance premiums because their insurer has assessed that their property faces a significant flood risk," he said in his keynote address to the annual General Insurance Exchange.
"However, any proposal to subsidise insurance premiums needs to be weighed against the alternatives such as mitigation and land buy-backs, as well as issues around complexity, market distortions and cost."
Flood victims John and Sharon Payne, who had about a metre of water through their Brisbane home in the 2010/11 floods, provide an example of how the current model is broken.
The couple have opted out of flood cover entirely because their insurer raised their annual premium from $1600 to $8500 last year and they couldn't find an affordable alternative.
As Emergency Services Minister Nicola Roxon pointed out this week, if the government acts by collecting more data about natural disaster danger areas, it could create a Catch-22 situation.
"This is something that's taxed us a lot because we do want people, on the one hand, to have better information about flood or fire risk before they move into certain areas," she said.
But if the new data leads to "jumping premiums", it would just mean many people opt out of insurance altogether.
"Which is not a good outcome for the country," she said.
Ms Roxon said Financial Services Minister Bill Shorten had been working with insurance companies and others to look at making sure proper risks were covered.
He was also trying to keep some control over premiums and prices.
"I don't think we've found a complete answer to that yet," she said.
Australian Greens leader Christine Milne says the government's "hiding their heads in the sand" definitely won't fix the problem.
Late last year, the Greens paved the way for a Senate inquiry into extreme weather frequency and preparedness, with a reporting date set for March 20.
The inquiry will look at "the availability and affordability of private insurance, impacts on availability and affordability under different global warming scenarios, and regional social and economic impacts".
The Greens are taking a cautious approach, saying they will await the inquiry's findings before commenting on a possible national disaster insurance scheme.
In the private sector, however, opinions are clearer.
Insurance Australia Group (IAG), a leading industry player selling insurance under the NRMA, RACV and CGU brands, has warned a national scheme could increase premiums and lead to risky housing developments in flood-prone areas.
While the New Zealand government-backed Earthquake Commission has worked well to provide widespread insurance, IAG chief executive Mike Wilkins says a similar program in Australia to cover natural disasters could distort the insurance market.
IAG will make a submission to the Senate inquiry later in January, arguing it's imperative to reduce risk in the community and improve preparedness for extreme weather events.
"I'm not a proponent of pooled [insurance] unless the risk is unknown or it is randomly spread across an entire population," Mr Wilkins said.
"New Zealand is a country on a series of fault lines. So the prospect of an earthquake occurring in Christchurch, in theory, is the same as the prospect occurring at the other end of the tip of the North Island.
"Where disasters are able to be risk-rated and where pricing can be appropriately set, a private-sector solution beats a pooled solution any day of the week."
The Insurance Council of Australia (ICA) will tell the inquiry a key factor driving increased losses in the community is the nature and location of the built environment.
"Australia must adapt to extreme weather impacts by improving practices in land-use planning, implementing mitigation where risks remain and reducing the vulnerability of the homes we build," the ICA said.
Prime Minister Julia Gillard says while the government has been looking into questions surrounding a national disaster insurance scheme, there are no immediate plans to move to a new model.
"The model we've got now is one where we make provisions for disasters and we are able to step in and give people emergency money and then work with our state colleagues for the rebuilding," she said during the Tasmanian bushfires earlier this week.
"It would be nice if we could end today with no one needing a payment because no one had suffered any loss, and that is what we've got to aim for."
Unfortunately, the losses have continued.
So the question the government faces is, will it watch the free market play out, or act on an insurance scheme?
The political and economic costs seem likely to be high either way.
www.news.com.au
11.1.13
