Affordability of Natural Disaster Insurance

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The accumulation of recent natural disasters has focussed community attention on the affordability of insuranceand resulted in calls for government intervention to enhance insurance affordability. In this paper, the underlying reasons for rising insurance premiums are discussed, along with factors that need to be considered as part of any policy response. Finally, we present a case study to illustrate how these considerations were combined during the design of the Government’s response to concerns about the affordability of flood insurance.

During the summer of 2010-11, Australia experienced a series of floods and cyclones. The insured losses suffered as a result of the Queensland floods and Cyclone Yasi alone are estimated to be around $3.8 billion. In the most recent summer (2012-13), Australia again experienced widespread flooding and bushfires. These events have heightened the attention of governments and the community to the role that insurance can and should play in facilitating recovery from natural disasters.

Alongside these natural disasters, insurance premiums have also been rising. Prices for home building insurance have in some cases more than quadrupling in a single year. Most of these large increases have been borne by properties with a high risk of flooding, cyclone or other natural perils. There is some evidence that suggests that affordability is a significant barrier to individuals obtaining insurance.

A related issue is community understanding of how insurance premiums are determined. In many cases, the process by which insurers set premiums lacks transparency. In addition, a lack of accurate data on which to base risk assessments can lead insurers to quote premiums that differ from policy holders’ understanding of their risk, or in other cases result in home owners misunderstanding the extent of the risk to which they are exposed.

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This paper was presented in July 2013 at the 18th Melbourne Money and Finance Conference (MMFC), which explored the theme Financial Sector Evolution – Prospect and Determinants.

For more papers presented in the conference, please click here.