APRA executive calls for Australia to increase investment in natural disaster mitigation

By Shannon Jenkins

October 15, 2020


The billions of dollars spent annually on cleaning up the damage caused by bushfires, floods and other natural disasters would be better spent on mitigation and hazard-reduction measures, according to Australian Prudential Regulation Authority executive board member Geoff Summerhayes.

In a speech to an Australian Business Roundtable webinar on Wednesday, Summerhayes noted research has estimated the total economic cost of natural disasters to Australia would reach $39 billion annually by 2050.

“If we accept evidence from the US that every $1 spent on resilience saves up to $11 in response and recovery costs, covering these losses would require the Australian community to invest about $3.5 billion each year on natural disaster mitigation and resilience. That’s an enormous sum, but it’s much smaller than the $39 billion cost,” he said.

“To repurpose a line from a speech I delivered last June on the subject of climate change adaptation, we either buy now or we pay more later.”

Australia’s general insurers faced paying out $5.4 billion from almost 300,000 claims related to last summer’s bushfires, floods and hailstorms. Summerhayes warned that Australia would face these events “more often and with greater intensity” in the future, with the bushfire season having already begun, and the Tropical Cyclone season expected to begin in a fortnight.

He argued the resilience of Australia’s financial sector and the broader economy “would be continually tested should last summer’s experience become the new normal”.

“Alarmingly, the clear message from Australian and global scientific experts suggests this may be the case,” he said.

While investing in resilience, mitigation and hazard reduction measures to protect communities and keep insurance affordable and accessible would be an expensive task, the last bushfire season confirmed that “failing to take action can be far more costly in the long-run, and the price paid is often far more valuable than can be measured in dollars”.

Further, “the billions spent each year cleaning up from disasters suggests the money is there — it’s just being spent after the damage is done”, Summerhayes said.

Read more: Royal commission calls for creation of federal recovery and resilience agency, national cabinet-style response to natural disasters

He said APRA was concerned that the impact of climate-related risks on insurance could lead to general insurance becoming unaffordable or even unavailable in parts of the country.

“Without access to appropriate general insurance, households and businesses would be less confident to invest or take financial risks in vulnerable parts of the country. Access to credit may be reduced, while credit risk for existing loans would rise,” he said.

“Communities would take longer to recover in the aftermath of disasters, and more of the financial burden of recovery would fall on governments and — by extension — taxpayers. For these reasons, countries with larger insurance protection gaps typically suffer more severe economic consequences after disasters, such as reduced productivity and higher debt levels.”

Since 2007, average home building insurance premiums in northern Australia have risen by more than 178% for home insurance, and 122% for combined home and contents insurance. Summerhayes said this was due to the rising cost of claims “driven chiefly by storms and cyclones”.

He said declining insurance affordability and accessibility in Australia’s north could be addressed by tackling the “high, rising and volatile cost of natural disasters”.

“The most effective way to do this is through greater investment in mitigation to protect homes, businesses and infrastructure from damage. There may be other approaches that serve, for example, to subsidise the cost of insurance, but on their own they will ultimately be less effective because they don’t lower the risk and may reduce the incentive to mitigate it,” he said.

Read more: Pezzullo proposes ‘extended state’ to fight national security threats

Earlier this week Home Affairs boss Mike Pezzullo delivered a speech proposing a new approach to tackling national security issues, including environmental threats, through a partnered response between government and the rest of society.

Summerhayes has put forward a similar argument in regards to addressing natural disasters.

“Ultimately, creating more resilient communities that are better able to withstand the physical and financial impacts of natural disasters and a changing climate requires a whole-of-society response,” he said.

“There are some problems that are simply too big, too complex or too expensive for any individual household, business or organisation to fix on their own.”

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