Coastal hazards, insurance and Federal powers
The tropical cyclone season is upon us and like clockwork issues of insurability arise. At recent hearings of the House of Representatives Committee inquiring into insurer’s responses to last year’s east-coast flood disaster, we hear from Australia’s insurance giants such as Insurance Council of Australia (IAG) , Suncorp and QBE warning that premium costs will spiral beyond the reach of more households (Sydney Morning Herald, 11/12/23). Andrew Dyer of IAG was reported as saying that current views on “acceptable risk” in land planning don’t adequately factor in natural disasters leaving some communities with “really unacceptable financial outcomes”. Suncorp said the task was “too big for any individual government”, and there is the need for enhanced building codes and better planning to stop communities from being put at risk, along with grants for property owners to make dwellings more resilient. As part of the “resilience mix” levees and other protective structures are often seen as “mitigating” risk to be paid from a government purse. What is exacerbating the problem of affordability is that higher premiums are spreading to lower-risk locations through rising reinsurance charges as extreme events become more frequent.
Much of the recent disaster risk debate has been centered on flood impacts and before that on fire. Our attention should not however be diverted from the impacts of coastal hazards. Here somewhat contentious and unique issues arise as to the whether private insurance policies will (or should?) cover “acts of the sea”. My understanding is that it very difficult to insure for loss due to the direct action of waves in damaging property as a result of coastal erosion. In this case there may or may not be loss of land to the sea. Any desire to rebuild on land that has been eroded but subsequently recovered would not receive insurance support. If damage was due to wind, rain or rainwater runoff then the owner may have a policy that covers such impacts in a coastal location. However, the situation gets murky when considering the impacts of a storm surge.
Commonwealth legislation passed last year before the election to create a reinsurance pool for cyclones and related damage could include loss caused by a weather system that produced a storm surge. A “storm surge” was defined by Regulation 5C (1) to the Terrorism Insurance Amendment (Cyclone and Related Flood Damage Reinsurance Pool) as “an abnormal rise in sea level, over and above the normal astronomical tide levels”. From what I can see this is the first time in federal insurance law that such a phenomenon is identified distinct from the definition of a “flood” under the Insurance Contracts Regulation 2017 (34 (1). Surge impacts accompanying a cyclone could sweep across low-lying coastal land with great force as seen in 2012 with Hurricane Sandy in New jersey and this year in the Black Sea at Sochi in Russia. Tropical cyclones around the Australian coast and offshore islands as well as from East Coast Lows could generate similar storm surges.
The purpose of the reinsurance legislation is to improve insurance affordability for households, strata and small business especially in northern Australia. It aims over time, to provide a pool that will offer discounts for policies that cover properties that have undertaken cyclone and flood mitigation. What is not clear is what constitutes mitigation at the householder level. And just how does that relate to appeals by insurers such as Suncorp in its recent parliamentary submission arguing for more government support and investment for mitigation efforts. Here I see a conundrum. An individual can “mitigate” to get a premium reduction based on his/her insurer accessing a reinsurance pool that saves it money while at the same time the insurer is seeking a government to provide “efforts” that will mitigate risk. However, there is no commensurate action required to reduce risk that will reduce harm by strategic adaptation planning to other landholders including local councils who are not eligible for insurance relief under the reinsurance pool. Is this a recipe for “maladaptive behaviour” in certain coastal locations?
Paula Jarzabkowski and Chas Keys writing in 2023 in Pearls and Irritations have separately identified many of the insurance issues we face from impacts of natural disasters. They see the need for long-term risk reduction involving updated planning and building regulations informed by accessible and consistent nationwide data collection and educating people about risks. We need to learn from how “risk pooling” is working in other countries especially in facing the challenges from climate change. Jarzabkowski and her colleagues stated: “If we don’t do something along the lines of government-provided and mandated reinsurance, insurance and its enormous benefits will no longer be available to an increasing share of Australians, regardless of their financial means” (P&I 26/8/23, also The Conversation,18/8/23).
The Australian Government has constitutional powers over insurance and banking. It also can develop building codes. The question is how best to use these powers in reducing risk. If coastal adaptation planning is to be effective then somehow a consistent model of risk pooling is needed. In coastal areas we know that lands will become progressively more and more inundated as sea level rises and storm surges become more devastating. Risk profiles in different areas will change over time hence the need for consistent communication of probable risk.
In my blog in February 2023 (Blog no. 233), I discussed the way in which the US Coastal Barriers Act (1982) effectively defined certain coastal areas as being so vulnerable to adverse hurricane impact that those living in those areas would receive no federal support. This action disincentivized state and local governments from encouraging development on designated coastal lands. Here the recently established Hazards Insurance Partnership (HIP) managed by the National Emergency Management Agency in my view should be looking at models such as these and go beyond its stated mission of “how insurance costs can be reduced”. It should develop a strategic approach linked to land use planning that defines over time what areas will and should receive insurance support using whatever risk pool process is acceptable to government and insurers. This approach could build on coastal vulnerability mapping by state and local governments and be integrated into the National Adaptation Plan (NAP). It must apply consistent methodologies that can be communicated to communities nationwide by all insurers.
Words by Prof Bruce Thom. Please respect the author’s thoughts and reference appropriately: (c) ACS, 2023. For correspondence about this blog post please email firstname.lastname@example.org