Public reinsurance — the bad idea with growing momentum

Using taxpayer money to offer reinsurance so that insurance companies will continue to provide affordable insurance to people living in climate change-affected regions is a bad idea. Extending that to even more communities as the impacts of climate change increase is an even worse one.

But good luck finding anyone in politics who’s willing to say that. Coalition champions of public reinsurance like Warren Entsch were last week calling for the new North Queensland scheme established in 2021 by the federal government to be extended further south. MPs from the Nationals, Labor and the Greens all want it too. The Greens announced they plan to try to legislate the extension when Parliament resumes.

The North Queensland scheme will cost $10 billion. How much more to provide reinsurance further south? In Brisbane? Northern NSW? How about Sydney?

Taxpayer-funded reinsurance simply treats the symptom, not the problems. The problems being both climate change — which is already significant and growing steadily worse — and our failure to investment in mitigation efforts to address its impacts.

That’s why insurance companies, which benefit from the reinsurance pool, think the huge sums it will cost to properly reinsure for large parts of regional Australia should be directed to mitigation, to prevent the need for mass claims in the first place.

But the story, over and over again in Queensland and northern NSW, is that the areas now flooded were denied funding for flood mitigation efforts by the Commonwealth. It’s the definition of bad policy.

Other countries have public reinsurance. The Productivity Commission (PC) examined how they fared. Its conclusion?

International experience has shown that government intervention in property insurance markets (either through direct provision of insurance or by providing risk pooling through reinsurance) is overwhelmingly ineffective. It creates moral hazard as well as fiscal risks.

The PC devoted a whole section in its disaster funding report of 2015 to the issue. Schemes run in countries such as France, New Zealand, the US and Japan had run out of money and needed bailouts. In a country more exposed to climate change-related disaster risks, and with climate change accelerating, how long before Australia’s reinsurance scheme needs a bailout?

But public reinsurance actually makes the problem worse because, with taxpayers on the hook for the bill in the event of disaster, there’s no incentive to undertake disaster mitigation work. “The availability of subsidised insurance can weaken the incentives of households, businesses or governments to implement measures to reduce their exposure and vulnerability to natural hazards. It can also encourage excessive development in high-risk areas,” the PC found.

Repeatedly the term “market failure” is used in relation to insurance for climate change-affected regions. But the market is not failing — it is sending a clear signal that the costs of the status quo are too high, that action is needed to curb the source of repeated insurance claims. Billing taxpayers for the cost of insuring homes and businesses that are virtually guaranteed to suffer another climate-driven calamity in future years is like sticking our heads in a pile of (borrowed) money and hoping the problem will go away.

Absent a comprehensive approach to mitigation — including better risk management, better land use planning, substantial money for infrastructure and improved information-gathering — public reinsurance is a political non-solution that makes everyone feel good but guarantees a continuing draw on taxpayer funds. All while the same money could be used to prevent the worst impacts of disasters in the first place.