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APRA urges mitigation to tackle insurance affordability threat

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The case for mitigation action is gathering strength as more intense and frequent natural disasters raise insurance affordability and availability risks, Australian Prudential Regulation Authority (APRA) Executive Board Member Geoff Summerhayes said in a speech today.

“The fact that Australia has always experienced bushfires, floods and cyclones isn’t an argument for inaction or complacency; quite the opposite, because it means these types of events will happen again, and the weight of scientific opinion indicates they will occur more often and with greater intensity,” he said.

Mr Summerhayes says countries with larger insurance protection gaps typically suffer more severe economic consequences after disasters, and action is important in ensuring protection.

Insurers facing the prospect of higher claims costs have the advantages of an increasingly sophisticated ability to measure the risk faced by individual policyholders and the fact that contracts are renewed annually, he said.

“This might be good for insurers, at least in the short term, but it’s bad news for policyholders, and economic activity more broadly,” he said.

“APRA’s biggest concern when it comes to the impact of climate-related risks on insurance is therefore not the prospect of an insurer becoming insolvent, it’s the possibility that general insurance might become unaffordable or even unavailable in parts of Australia.”

Mr Summerhayes told the Australian Business Roundtable for Disaster Resilience and Safer Communities webinar that the prospect of more extreme weather, rising sea levels and hotter drier conditions suggests the protection gap will not only expand in the north, it will spread to other parts of the country.

APRA has submitted to the Australian Competition and Consumer Commission Northern Australia Insurance Inquiry that mitigation is the best way to tackle the issue.

“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.

Mr Summerhayes says responsibilities lie with governments, households and businesses, while insurers can also do more to incentivise mitigation.

“If insurers want their argument that lowering the risk lowers the premium to be taken seriously, they must do more to recognise mitigation by home and business owners and reward it accordingly,” he said.

Treasurer Josh Frydenberg flagged in his Budget speech last week that the Federal Government would make mitigation funding announcements following the Royal Commission into National Natural Disaster Arrangements final report.

The Insurance Council of Australia (ICA) today supported ARPA’s call for mitigation action and said it had been working closely with Treasury to identify areas of high exposure where projects should be considered as a priority.

“Without mitigation the damage bill in vulnerable communities, northern Australia in particular, will continue to soar," CEO Andrew Hall said. “At present only 3% of natural disaster budgets are spent on prevention.”

ICA modelling suggests Townsville insurance premiums could be reduced by up to 21% by reducing flood risk through permanent mitigation, with further reductions of 9-12% possible through building resilience and improved flood-level data, while the removal of state stamp duties on insurance could see a 9% fall.