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Prevention, not a cure: reducing the costs of natural disasters

Posted By and on April 1, 2016 @ 12:30

Seventeen billion dollars will be needed to directly replace critical infrastructure between 2015 and 2050 due to the impact of natural disasters in Australia.

That’s a key finding of this month’s report [1] from the Australian Business Roundtable for Disaster Resilience & Safer Communities prepared by Deloitte Access Economics.

The study examined the financial costs of extreme weather events in Australia and the dramatic growth in anticipated costs to 2050. It found that in 2015 the total economic cost of natural disaster events in Australia exceeded $9 billion, or about 0.6% of gross domestic product. These costs are expected to rise to an average of $33 billion per year by 2050.

Another key finding showed that carefully targeted investment in resilience measures now will reduce estimated expenditure by Australian governments on natural disaster relief and recovery by more than 50% by 2050.

Resilient infrastructure will play a crucial role in helping communities to withstand, respond to and recover from the potentially devastating impact of natural disasters in Australia. But there’s still no requirement for government or the private sector to consider resilience when making investment decisions. The message is clear: we should be investing in disaster risk reduction.

The Insurance Council of Australia understands this very well. The ICA points out [2] that climate change scenarios predict a progressive increase in the frequency and intensity of natural disasters over the coming 100 years.

We need to reduce regional exposure by making development decisions for exposed locations over the planned life cycle of a development and strengthening local infrastructure to achieve an acceptable residual risk of damage. Building codes need to be improved to ensure that built structures remain viable to predictable events over their planned life cycle.

The ICA’s message supports the key findings of the Turnbull government’s Northern Australia Insurance Premiums Taskforce [3] which recently handed down its report.

The Taskforce found that mitigating the risk of damage is the only sustainable way of lowering insurance premiums in cyclone prone regions of northern Australia, saving lives and reducing property damage. Mitigation could reduce premiums by up to 15 percent, as opposed to a government cyclone mutual or reinsurance pool. The mitigation options outlined in the report include stronger building standards, better retrofits for older homes, mitigation awareness campaigns and making insurance more responsive to mitigation.

The expected long-term future losses from cyclones in northern Australia will average around $285 million per year. The Australian Government Actuary concluded in 2014 [4] that the estimated cost of cyclone damage is likely to be the main reason why north Queensland premium rates are, on average, significantly higher than premium rates in most other parts of Australia: premium rates increased by about 80 percent from 2005-06 to 2012-13. Insurers still had to pay out $1.40 for every dollar collected in premiums across northern Queensland.

At the same time, the Productivity Commission [5] concluded last year that current government natural disaster funding arrangements weren’t efficient, equitable or sustainable. The Commission identified natural hazard risk as the key driver of insurance premiums and recommended a five-fold increase in annual mitigation funding, phasing out of stamp duty on insurance and improved land use planning laws.

It found that private exposures just grow without robust price signals. International experience showed that government intervention in property insurance markets through subsidies was overwhelmingly ineffective—it created a moral hazard as well as fiscal risks.

The cost of insurance can be high in higher-risk areas, such as flood plains and cyclone-prone areas. But the best way to lower premiums and reduce the losses from natural disasters is through public investment in mitigation to protect infrastructure—not government intervention.

Motivating property owners to undertake personal steps toward risk mitigation can be difficult. While the cost of mitigation efforts that reduce damage is mainly borne by individual property owners, knowing what actually works can be difficult to determine.

Leveraging the input of science for disaster risk reduction will be important. A good example of linking disaster risk reduction research and the insurance industry has emerged in North Queensland. Research into cyclone damage by the James Cook University’s Cyclone Testing Station [6] found that the severity losses during cyclones could be reduced by carrying out a series of relatively minor reinforcements or additions to homes.

These changes range from strengthening roofs of older homes by replacing how the roof framing is held together, adding connections between roof and foundations of a home, the addition of waterproofing under roofing as well adding protective shutters.

Suncorp, the biggest insurer in Queensland, recently introduced a new insurance initiative to provide a real incentive for disaster risk mitigation by Queensland homeowners, ranging from Rockhampton to the north of the state. Branded as the Cyclone Resilience Benefit [7], it provides a range of options to reduce the cost of home insurance, if homeowners add some or all of the suggested mitigation actions suggested by James Cook University’s Cyclone Testing Station.

Recognising and rewarding homeowners who make their homes more resilient shows what can be achieved if industry and communities work together on finding solutions to mitigating the effects of natural hazards.

When it comes to safeguarding our communities against natural disasters, prevention is always better than cure.



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URL to article: https://www.aspistrategist.org.au/prevention-not-a-cure-reducing-the-costs-of-natural-disasters/

URLs in this post:

[1] this month’s report: http://australianbusinessroundtable.com.au/our-papers/resilient-infrastructure-report

[2] The ICA points out: https://www.linkedin.com/pulse/insurance-council-climate-change-policy-update-karl-sullivan

[3] Northern Australia Insurance Premiums Taskforce: http://www.treasury.gov.au/ConsultationsandReviews/Reviews/2015/NAIP-Taskforce/Final-Report

[4] The Australian Government Actuary concluded in 2014: http://www.aga.gov.au/publications/home_contents_nth_qld/downloads/Home-Contents-North-QLD.pdf

[5] the Productivity Commission: http://www.pc.gov.au/inquiries/completed/disaster-funding#report

[6] James Cook University’s Cyclone Testing Station: https://cyclonetestingstation.com.au/publications/technical-reports

[7] the Cyclone Resilience Benefit: http://www.suncorp.com.au/insurance/safety/cyclone-resilience-faqs

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