Investing more in natural disaster mitigation is key to keeping general insurance available and affordable in northern Australia, according to the Australian Prudential Regulation Authority (APRA).
APRA, the independent statutory authority responsible for ensuring general insurers have sufficient financial strength to pay all legitimate claims, noted that premiums in disaster-prone areas in the country’s north have skyrocketed over the past decade in comparison to the rest of Australia, raising concerns that some households and businesses may soon be unable to afford cover.
Geoff Summerhayes, APRA executive board member, said the only sustainable way to reduce premiums was to lower the risk of property damage. He also called for an informed debate about the best way to fund mitigation and adaptation.
“Hundreds of millions of dollars each year are spent on disaster funding but about 97% goes towards clean-up and recovery, with only 3% directed to mitigation and prevention,” Summerhayes said. “Addressing this imbalance will save money in the long-term by reducing the physical loss and economic disruption caused by storms, floods, cyclones and bushfires. All levels of government, working with insurers, and other stakeholders, can help to protect vulnerable communities by investing in mitigation, such as flood levies and sea walls, risk mapping, and more robust building codes. Crucially, lowering the risks faced by policyholders typically leads to insurance premiums falling. The experience of Roma in south-west Queensland after the 2012 flood event provides an example of this collaborative approach and shows the way forward. Evidence suggests insurance premiums fell by 50% to 90% following the completion of flood mitigation infrastructure.”
“To ensure a lasting impact on insurance premiums, we need to address the underlying cause of high insurance costs in the area, which is the frequency and scale of natural disasters,” Dransfield said. “Other options being explored through the inquiry may address affordability in the short term, however they will do nothing to improve this risk. Our position has been consistent for many years and it has been echoed by countless inquiries. ‘Lower the risk, lower the cost.’”
The Australian Competition and Consumer Commission is currently examining a range of measures that may help to address insurance affordability as part of the Northern Australia Insurance Inquiry.
The Insurance Council of Australia (ICA) also welcomed APRA’s call for greater investment in natural disaster mitigation, as it once again urged the federal government to increase funding for mitigation and resilience projects to at least $200 million a year.
“APRA correctly identifies that lowering the risk of property damage is the only sustainable way to lower insurance premiums,” ICA CEO Rob Whelan said. “Risk-based pricing means property owners at greater risk pay higher premiums, and the ICA agrees insurance prices in northern Australia are a symptom of a much deeper problem. Mitigation and resilience projects should be treated by governments as nation-building infrastructure that protects communities, generates jobs and improves regional economies.”
