How rising government disaster payouts could force us to find a ‘better way’ on climate adaptation

By Bernice Han

The federal inquiry into insurers’ handling of the 2022 floods has delved into a seldom-discussed topic – one that is becoming more important in a country facing an upsurge in climate-driven extreme weather events: government disaster recovery payments.

Consumer advocacy groups have told the inquiry such financial support is a crucial lifeline for people after catastrophe strikes. Most recipients have been either unable to make an insurance claim because of policy exclusions or have no cover because they can’t afford it, they say.

In one submission, Legal Aid New South Wales says the high cost of insurance is “consistently” raised by its clients in areas hit by the 2022 floods. Premiums are higher in these places because disasters occur more frequently, and they are often lower-socioeconomic communities. As a result, government grants are one of the few viable means for recovery.

“These initiatives are critical to assist disaster-affected people who do not have any or adequate insurance cover to recover from disasters,” Legal Aid says.

“However, the increasing reliance on these programs highlights the significant gap created by unaffordable insurance products.”

With extreme weather events such as floods expected to intensify in frequency and severity, the role and size of government financial assistance is tipped to grow.

In a 2022 report commissioned by the Insurance Council of Australia, the McKell Institute has projected that select economic costs from extreme weather will grow by 5.13% a year before inflation to hit $35.24 billion (in 2022 dollars) in 2050.

The institute’s breakdown shows federal government costs will rise from $1.96 billion last year to $7.57 billion over the period; state government costs from $1.18 billion to $4.54 billion; insured costs from $3.21 billion to $12.37 billion; and uninsured costs from $2.79 billion to $10.76 billion.

“As extreme weather events are becoming more severe and widespread, the governments [are expected to] take a more active role in recovery and support payments,” the institute says.

Commonwealth outlays include disaster payments and restoration of essential public assets. It has a disaster recovery cost-sharing arrangement with the states and territories to provide urgent financial assistance to affected communities. Under the Disaster Recovery Funding Arrangements, the federal government may reimburse up to 75% of the financial assistance provided.

The National Emergency Management Agency says the Disaster Recovery Funding Arrangements assistance is not intended to replace appropriate self-help strategies, such as acquiring insurance or undertaking disaster mitigation.

Still, there are some concerns that taxpayer-funded disaster payouts may have unintended consequences.

Federal MP Daniel Mulino, chair of the 2022 floods inquiry, posed the question in one public hearing: could some of the government benefits provided to uninsured people, and not to those who have insurance, have led to “perverse effects”?

Federal MP Daniel Mulino chairs the 2022 floods inquiry. Top picture: Federal Emergency Management Minister Murray Watt, Lismore MP Janelle Saffin and NSW Premier Chris Minns meet State Emergency Service volunteers in Lismore last year. Credit: AAP

“In a sense, the rationale for that would be to try to get it to the people who most need it,” he said. “But given that some people who are insured end up with quite long delays and complications, is it fair to say that can sometimes have perverse effects and actually create a disincentive for insurance?”

There are eligibility rules for disaster payments. While these vary across states and territories, recipients typically have no insurance or are unable to make a claim under a policy.

In New South Wales, the Disaster Relief Grant helps with replacing essential household items and essential structural repairs, or full rebuilds for properties that cannot be lived in.

A spokesperson for the state’s Reconstruction Authority says grant applicants undergo an assessment including a review of income and disposable income. If applicants have insurance, their policy will be reviewed to understand what is covered; if they have no insurance, they may be eligible for a grant, which is designed to help people recover a basic standard of living.

Queensland has the Essential Household Contents Grant for people who are uninsured or unable to claim, and who meet an income test.

It provides a contribution towards repairing or replacing essential household contents such as beds and white goods damaged or lost in a disaster. Uninsured, low-income earners may receive up to $1765 for single adults and up to $5300 for couples or families.

“The reality is that … there will be some people who don’t have insurance and a critical role of government is to provide a safety net.”
MP Daniel Mulino

In an interview with Insurance News, Dr Mulino was asked if insurance-related criteria around who qualifies for government disaster benefits may have encouraged some people not to buy home and contents cover.

“Theoretically, that is possible … but I don’t think we have clear evidence of that … that assistance tends to be only a proportion of the total cost they are going to incur [and], moreover, it tends to be a little bit uncertain,” he says.

“For me, the clear evidence is that rates of underinsurance or non-insurance generally are much more driven either by insurers not wanting to provide insurance to certain areas because they are seen as too high-risk, or the premiums going up. I think that is the key driver.”

Dr Mulino also explained further his views on government disaster payments when asked if the support was unfair to people who have insurance, since they will not qualify for it.

“I wouldn’t classify it as unfair … the reality is that at any given point in time, there will be some people who don’t have insurance and a critical role of government is to provide a safety net, so it is important after natural disasters [when] there are some people who are left in a very vulnerable position that government plays that role.”

The Financial Rights Legal Centre’s director of casework, Alexandra Kelly, says the consumer group is always wary of arguments that imply some kind of moral hazard over people who forgo insurance. “It just doesn’t reflect reality,” she tells Insurance News.

She says insurance can be unaffordable for any number of reasons. “You only have to look at the huge increases to premiums after recent disasters to understand how quickly it can become unaffordable, even for people on a good income.”

Financial Counselling Australia does not believe government disaster payments will discourage people from buying insurance. The consumer advocate says the aid is an important safety net for low-income earners who are uninsured or unable to claim, and who pass the means test.

“Climate change and rising insurance premiums are the real issue,” co-chief executive Peter Gartlan tells Insurance News.

Paula Jarzabkowski, the University of Queensland’s expert on the insurance protection gap, says disaster recovery payments are necessary as an interim measure while the country works on improving long-term resilience.

Insurance affordability is likely to get worse, she says, referring to an Actuaries Institute report last year that found 1.24 million households were facing premium stress, up from 1 million in 2022. The rise came as premiums jumped 28% nationally and up to 50% on flood-prone properties.

“People wind up uninsured because they are in high-risk areas and they can’t afford it,” Professor Jarzabkowski tells Insurance News. “We are at a really critical point … we’ve got plenty of people in these situations. It’s really important that we work with what we’re learning from doing these payments, to work with communities, insurers and governments on a better way forward.”

“You only have to look at the huge increases to premiums after recent disasters to understand how quickly it can become unaffordable, even for people on a good income.”
Alexandra Kelly, Financial Rights Legal Centre

She says disaster recovery payments are a signal that “there are people we need to help with climate adaptation”.

Taylor Fry principal Jonathan Cohen says recovery payments are a form of social safety net. “There is probably a role for it if you restrict it to emergency support for individuals.”

Home insurance affordability is a challenge, but the pain is not being felt equally. “There is quite a lot of evidence that it has a much stronger impact on lower-income households as they have lower financial buffers to cover the rising cost.”

Dudgeon Berry Insurance Group’s Daniel Berry, who has seen some of his clients in Lismore, New South Wales, forced to go without flood cover because it is too expensive, believes government disaster support will become more important.

“Our business is based in Lismore, which we all know is an area that is susceptible to floods,” he tells Insurance News. “The problem we see as insurance brokers is that for those living in the area, insurance is unattainable this year … for these clients, they need some reassurances that they have got some level of protection to give them peace of mind.”

An Insurance Council spokesperson says the industry supports government disaster recovery programs where they are most needed. Over the longer term, investment in mitigation and resilience is required to reduce risk and ease pressure on premiums.

Matt Williamson, who runs brokerage Good Cover in Bangalow, northeast of Lismore, believes there is another way to help risk-prone communities.

He tells Insurance News the protection gap is a function of high premium cost. The premium, he says, is typically driven by a single peril such as flood or cyclone.

“The government could force insurers to break out this peril pricing. Behavioural economics tells us that this small piece of knowledge has the potential to drive outsized positive outcomes,” says Mr Williamson, who is also president of Byron Bay Chamber of Commerce.

“It could turn all of those policyholders into advocates for mitigation in their local area; it could cause new [property] purchasers to think twice about buying in a high-peril area; it could cause homeowners to take action with their asset that could reduce the risk, and their premium.”