Insurers support APRA’s call on disaster mitigation funding to address affordability issues

The Insurance Council of Australia (ICA) has welcomed a call by the Australian Prudential Regulation Authority (APRA) today for significant funding for investments in natural disaster mitigation.

In a speech delivered to the Australian Business Roundtable for Disaster Resilience and Safer Communities this afternoon, Australian Prudential Regulation Authority (APRA) executive board member Geoff Summerhayes said the “high, rising and volatile costs” of natural disasters was leading to declining insurance affordability and accessibility.

He said tackling the root cause “through greater investment in mitigation to protect homes, businesses and infrastructure from damage” was the most effective way of meaningfully and sustainably addressing the issue.

ICA CEO Andrew Hall said the industry supported APRA’s view that substantial investments in mitigation were required to protect high-risk communities from the impact of extreme weather events such as cyclones, floods and bushfires, and thereby reduce pressures on insurance premiums.

He said Treasurer Josh Frydenberg had flagged in his Budget speech that the Federal Government would make mitigation funding announcements in response to the Royal Commission into National Natural Disaster Arrangements. The response is due within several weeks.

“The clear and urgent message to all levels of government from APRA, and from many other organisations including the Productivity Commission and from numerous inquiries, is that investments in mitigation that reduce the physical risk to properties is the only sustainable way to reduce insurance premiums,” Mr Hall said.

“Without mitigation, the damage bill in vulnerable communities – northern Australia in particular – will continue to soar. At present only 3 per cent of natural disaster budgets are spent on prevention.

“The cost of inaction will ultimately cost governments and communities much more than sensible, timely and effective investments in prioritised mitigation programs.

“The ICA has been working closely with federal Treasury to identify areas of high exposure where mitigation projects should be considered as a priority. Many schemes are at an advanced stage and only require approvals and funding to go ahead.”

CASE STUDY 1: Townsville

Townsville is one of the most flood-exposed cities in Australia and is also highly vulnerable to cyclones. ICA data shows that the average premium for a building that is compliant with cyclone building codes and has no significant flood exposure is $1933. For buildings that are believed to be cyclone non-compliant with an acute flood exposure, average premiums rise to $2710.

ICA modelling suggests that reducing flood risk through permanent mitigation could reduce insurance premiums by up to 21 per cent. Further significant premium reductions of 9-12 per cent would be possible through improving building resilience to storms and cyclones, and improvements in flood data to show first-floor heights. Premiums would also fall by 9 per cent if the Queensland Government removed stamp duties on insurance.

CASE STUDY 2: Cairns

In Cairns, the average premium for a building that is compliant with cyclone building codes and has no significant flood exposure is $1801. For buildings that are believed to be cyclone non-compliant with an acute flood risk, average premiums are $2841.

ICA modelling suggests that reducing flood risk through permanent mitigation could reduce insurance premiums by up to 20 per cent. Further significant premium reductions of 9-16 per cent would be possible through improving building resilience to storms and cyclones, and improvements in flood data to show first-floor heights. Premiums would also fall by 9 per cent if the Queensland Government removed stamp duties on insurance.

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