Bryan’s Blog: A solution for a national catastrophe pool

What don’t the Queensland floods and the Christchurch earthquake have in common? Well besides the obvious flood vs earthquake, there are lots of glaring dissimilarities in terms of government risk financing for catastrophic events. New Zealand has the Earthquake Commission (EQC) which pays for damage for losses on residential properties from earthquake, natural landslip, volcanic, tsunami and related hazards. It has been operating since 1945!

The EQC model is not perfect but it does have the following key attributes:

  • It is not for profit, it is there to help victims of major disasters.
  • It has collected a large fund over many years, has sophisticated reinsurance protection and is backed by a government guarantee.
  • Its role includes advanced planning of its claims management response to a major event.

The big difference between many Queensland flood victims and your average Christchurch earthquake victim was that when a Queenslander who lost their house said “we have lost everything”, they were right because most home insurance policies do not cover flood. In Christchurch victims heard the call from the EQC to be patient but to make their claims as soon as they could. This is because the EQC pays for earthquake claims for insured people up to $100,000 where after their insurance policy takes over. The EQC was there to help. In Queensland the public, government and insurers simply pointed fingers at each other…

What should an Australian model look like? The answer needs to be based not just on this flood event, but on all of the problems that besiege communities hit by catastrophe. They include:

Poor land use planning, for example building a house in a 20yr flood plain…
High % of non-insured homes and businesses due to both ignorance and affordability.
High % of under-insured homes due to both ignorance and affordability.

The insurance industry is not the answer. It may be part of the answer but it CANNOT legislate on land use and it CANNOT force someone to buy an insurance policy with an adequate policy limit. An insurance policy with fantastic flood cover using plain English wording for a home in a known frequent flood plain would be unaffordable except for the most wealthy who are the ones who can afford not to insure anyway.

The answer is a combined government and insurance industry response that should look like this:

The catastrophe fund should be government controlled and guaranteed and should be for catastrophes of all kinds.
Access to funds should not be dependent on insurance policy ownership, it should be based on financial loss.
Contributions (much nicer word than premiums) to the fund should be by property owners (who will inevitably pass on some or all of this cost to tenants who will also benefit from the scheme).

Contributions should not be solely determined on property values and proximity to sources of catastrophic events. All Australians benefit from the rural activities in the areas affected by the Queensland floods. Everything from food supply to contributions to national GDP. In addition, no one knows where the next catastrophe will be. Take the Newcastle earthquake for example. The risk was not recognised before the event. The severity of the event in Christchurch was also a surprise.

A portion of the fund should be used for research into improving land use in Australia. For example, cost-benefit analysis for flood proofing regions vs moving towns.

The reason it is difficult to devise an Australian model is that we have extremely influential property owners. Many of us own properties and we are resistant to more tax. Well, with recent government policy, those who pay decent tax levels are going to be paying more anyway by way of a levy. Even without a levy, every major catastrophe impacts our economy which impacts our wallets. Why would we not plan for the recurring inevitable?