December 8, 2022

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OPINION / A Watershed Moment for Insurance

"...Pardon the pun, but we are at a watershed here. Do we do what we did in 2011 and 2017 and allow people to rebuild their flooded homes and businesses only to see them flooded yet again? Do we watch while councils and state governments rebuild flooded infrastructure rather than relocating it or building it back in a way that is more flood-proof?..."

THE Gladstone Line is likely to move further south after the catastrophic floods. The Gladstone Line is an imaginary line north of which it is harder to get insurance at what was hitherto a reasonable price or it is impossible to get it at all.

The moving of the Gladstone Line south will cause the Morrison Government a few headaches. Helping out will be a tacit acceptance that adaptation to global heating is necessary, but doing nothing (a favourite Morrison option) could cost a lot of votes.

Millions of people – in metro Brisbane and Sydney and dozens of flood-affected towns – whose wages have hardly moved for years and who are facing higher prices induced by Covid and flood attacks on supply chains are not going to be happy when they get their insurance-renewal notice.

However, the cost of helping them is so high it will also mean a tacit acceptance that a decade of world climate negligence has its price.

Let’s go back to the Gladstone Line. Since a series of cyclone and related floods hit north Queensland starting with Yasi in 2011, insurers have almost doubled premiums for house insurance. Many insurers will not insure boats moored north of Gladstone at all, or the premiums are so high (five per cent of value or more) that the insurer is betting that the boat will be destroyed sometime in the next 20 years.

They will insure for public liability and third-party property damage, because cyclones do not generate these sorts of claims.

In general, insurers like to be the Good Samaritan turning up to one-off catastrophes, but hate widespread natural disasters. They are in business, after all, so they have to either refuse certain risks or price them heavily.

People often misguidedly think that they are insuring a house, car or boat. Not so. They are insuring against a set of defined events causing loss or damage to the house, car or boat.

As no doubt the owners of shelled apartments in Kyiv are finding out, losses through acts of war, for example, are not covered.

In Australia, a lot of insurers offer cheaper premiums if flood is excluded, especially in areas where local councils have been stupid enough to allow building in low-lying areas.

Insurers look at the risk postcode by postcode, suburb by suburb. The difference in premiums between Far North Queensland and the rest of Australia is truly astonishing. But it is based on the risk. No sane insurance company would seek to gain extra market share by lowering premiums because they would expose themselves to bankruptcy in the event of a widespread disaster.

More importantly, to ameliorate the risk they have to take out reinsurance which they can draw upon if disaster strikes. That costs, and it has to be passed on to consumers.

The Far North position got electorally sensitive. People were outraged at rising premiums, and there are a lot of marginal seats down the coast of Queensland. So in May last year, the Federal Government announced that it would underwrite reinsurance to the tune of $10 billion in northern Australia. The scheme would begin on 1 July 2022.

It was a classic Morrison Government “announceable”. If there is voter agitation, the Government must be seen to be doing something now, even if the actual doing is postponed. Moreover, it was a classic example of the Morrison Government giving help to the private sector (insurance companies) to deal with what should be a whole-of-community problem.

So, what happens when the Gladstone Line moves – with the changing climate – south to perhaps as far as the Prime Minister’s own electorate in the south of Sydney.

Millions of people in metro Brisbane and Sydney and dozens of flood-affected towns whose wages have hardly moved for years and who are facing higher prices caused by Covid and flood attacks on supply chains are not going to be happy when they get their insurance-renewal notice.

Small businesses will be similarly affected.

This a far greater problem than that of the Far North. A reinsurance fund of just $10 billion will not cut it. But the newly flooded will inevitably ask: if the Government can help the North, it can help us.

Climate change means hundreds of thousands of dwellings and businesses are in floodplains that did not exist before. Moreover, population pressure brought on by rampant increases in immigration from the time of the Howard Government have put pressure of state on local governments to allow development in places that are susceptible to flooding.

Pardon the pun, but we are at a watershed here. Do we do what we did in 2011 and 2017 and allow people to rebuild their flooded homes and businesses only to see them flooded yet again? Do we watch while councils and state governments rebuild flooded infrastructure rather than relocating it or building it back in a way that is more flood-proof?

More importantly, the danger here is that a whole lot of decisions by individual people, businesses and councils, unless checked, will determine what happens.

In the long run we all pay in varying shares for flood damage – either through higher insurance premiums of through taxes to pay for aid to victims and to pay for infrastructure rebuilds.

Further, continuing with the existing model will result in a vicious circle. Big flood events cause big insurance pay-outs which cause big rises in premiums which in turn cause people to risk not insuring, especially those on low incomes, so the public burden becomes higher.

An intelligent government would ask: what is the point of rebuilding in what are now flood plains caused by climate change, only to see it all destroyed sometime in the next decade?

Wouldn’t it be better to have a national effort at redrawing flood maps; helping people relocate; and reducing the population pressures on our towns and cities which encouraged developers to build where they should not?

But that would require an acknowledgement that the climate has changed for the worse and the intelligence to do something beyond mere band-aid repairs –things no Australian Government has been prepared to do for the past decade.

This article was first published in The Canberra Times and other Australian media on 8 March 2022.


www.crispinhull.com.au

Crispin Hull BA, LLB (Hons) | Property Convenor  |  ANU School of Legal Practice Lawyer of the Supreme Court of the ACT, on the Register of Practitioners kept by the High Court of Australia