Funding disaster mitigation as important as recovery funding

The Flinders Chase Visitors Office after bushfires swept through Kangaroo Island, southwest of Adelaide Picture: AAP

The Insurance Council of Australia strongly believes federal budget planning would be enhanced if greater recognition were given to the benefits of funding disaster mitigation.

It also advocates that funding be prioritised for updating the Australian Bureau of Statistics’ 2007 National Survey of Mental Health and Wellbeing. More broadly, it reiterates its support for ongoing tax reform.

Setting out the reasoning behind its proposals, the insurance council recognises that having an appropriate level of insurance cover is an important part of everyday life in Australia, particularly in light of the devastating ­impact that natural disasters can repeatedly have on many ­communities.

The council welcomes the ­creation of the new National Drought and North Queensland Flood Response and Recovery Agency, but as it has consistently argued, there needs to be an ­appropriate balance between the money spent on disaster response activities compared with the funding for disaster mitigation.

As highlighted by the Australian Prudential Regulation Authority in its submission to the ACCC’s Northern Australia Insurance Inquiry second update report: “Hundreds of millions of dollars each year are spent on disaster funding but about 97 per cent goes towards clean-up and recovery, with only 3 per cent directed to mitigation and prevention.”

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.

APRA’s September 2019 statistics show the general insurance industry generates gross written premium of $49.5bn a year and has total assets of $128.3bn.

The industry employs about 60,000 people and on average pays out about $155.1m in claims each working day.

Insurance council members provide insurance products ranging from those usually purchased by individuals (such as home and contents insurance, travel insurance and motor vehicle insurance) to those purchased by small businesses and larger organisations (such as product and public liability insurance, professional indemnity insurance, commercial property, and directors and officers insurance).

Correction of this imbalance, in a manner that incentivises a ­systemic approach to reducing ­existing community exposures and preventing future planning mistakes, should be a national ­priority.

Greater investment by the ­federal government in disaster ­resilience and mitigation programs would significantly help communities strengthen their ability to bounce back from natural disasters. The benefits of mitigation are manifold, including improved community safety and economic stability and lower insurance premiums.

The insurance council believes the 2020-21 budget should prioritise disaster mitigation funding in order to reduce the Australian community’s exposure to natural disasters.

It acknowledges that mitigation funding had recently been increased by $50m. However, that still falls significantly short of the $200m annual total for mitigation funding that the Productivity Commission recommended in 2014 in its report on natural disaster funding arrangements.

The government could consider the possible synergies of ­devoting some of the money it has earmarked for infrastructure to projects that would increase the resilience of vulnerable com­munities.

Furthermore, the insurance council submits that to ensure that care is taken in identifying and ­selecting mitigation projects, ­increased mitigation funding should be conditional on matched funding contributions from the states and territories and implementation of best practice ­institutional and governance ­arrangements.

As a means of facilitating a ­better recognition of the benefits of mitigation measures, the insurance council strongly supports the government publishing estimates for the future costs of natural disasters in the budget’s Statement of Risks.

The council also submits that the natural disaster recovery budget should be informed by catastrophe modelling, rather than the simple historical average of costs (as currently used in NSW).

In addition, the insurance council notes the release on ­November 14 last year of a draft guidance note for applications to the Treasurer for the economic ­infrastructure staples tax con­cession.

The concession could potentially be used to encourage nonresident investment in nationally significant infrastructure facilities that mitigate the level of damage caused by natural disasters.

As the federal government considers lessons in light of the current catastrophic bushfire season and the impact climate change will have in making bushfire seasons longer and more ­severe, tax reform is a vital consideration for community resilience, risk management and ensuring that citizens can recover from a disaster.

Nationally, the insurance council estimates that GST and stamp duties add 21 per cent to the cost of premiums in Victoria, Tasmania, Western Australia and Northern Territory, 19.9 per cent in Queensland and 22 per cent in South Australia. (We note that the ACT has phased out stamp duties on insurance products.) When GST, stamp duty and the Emergency Services Levy are combined, it leads to an effective tax of 45 per cent on a home insurance policy premium in NSW.

Higher costs mean consumers are disincentivised from adequately insuring and this presents a challenge for governments at all levels as climate change increases their exposure to liability for natural disasters.

Rob Whelan is chief executive of the Insurance Council of Australia. This is an edited extract of the ICA’s recently released pre-budget submission.