Governments to buy ‘top up insurance’ for natural disasters

An independent government body has called for a complete overhaul of natural disaster funding arrangements, including giving governments the option of buying more insurance.

States and territory governments should be given the option of purchasing ‘top-up insurance’ under recommendations made by the Australian Government’s independent research body the Productivity Commission.

The body, releasing its draft report into improving natural disaster funding arrangements, called for a complete overhaul of Australian Government funding of natural disasters, with financing for relief and recovery to be reduced, and mitigation funding to be increased.

It also proposed that state and territory governments have greater autonomy in how the funds are spent and the option of purchasing 'top-up insurance' if they require it with the proviso that the Australian Government would need to engage the services of reinsurers to price the insurance.

The report noted that while new administrative arrangements for the management of the scheme may be necessary, calculating premiums should be less complex: “As this coverage is provided for additional eligible expenditure, rather than insurance for state and local assets, it is likely to be more straight forward to estimate ‘actuarially fair’ premiums, and historical Natural Disaster Relief and Recovery Arrangements (NDRRA) claims data could be useful in this regard.”

The commission also recommends the Australian Government increases its funding to the states for mitigation from about $40m currently to $200m annually. Mitigation funding, it said, should be conditional on matched funding contributions from the states and territories and best practice institutional and governance arrangements for identifying and selecting mitigation projects, including partnering with insurers to encourage take-up of adequate private insurance and private mitigation.

Recommending a severe reduction in support for the NDRA, it called for the small disaster criterion to be increased from $240,000 to $2m, increasing the annual eligibility thresholds and having a flat cost sharing rate of 50%.

The inquiry said the current NDRRA create a “financial disincentive” for governments to invest in mitigation and insurance because they must bear the full costs of those activities but only pay a fraction of the cost of restoring essential assets damaged by a natural disaster.

The commission also recognised the significance of insurance and said households and businesses should manage natural disaster risks to their assets. It added: “Insurance markets in Australia for natural disaster risk are generally working well. Pricing is increasingly risk reflective, even to the individual property level.”

Commissioner Karen Chester stressed the inquiry was “not driven by the need to reduce fiscal costs for the Australian Government but the need to restore autonomy and incentives to better manage natural disaster risks,” she added.

The ICA welcomed the report’s findings and said the organisation and its members would continue to work with governments to ensure the best available risk data is developed by governments and accessed by insurers and their clients.

The Australian Business Roundtable for Disaster Resilience & Safer Communities also welcomed the report but highlighted the need for a national platform for natural disaster information so there is a single point of access to data to protect families, homes and businesses. Speaking on behalf of the Roundtable, IAG managing director and CEO Mike Wilkins said: “Natural disasters like floods, cyclones and bushfires don’t stop at state borders so we need a nationally co-ordinated approach to dealing with them,” he said.

The commission is seeking views on the proposed reforms. Submissions will be accepted until 21 October.

To read the full report, click here:

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