Economics and finance, Environment & energy, Government and governance, Law | Australia

21 February 2020

With extreme weather events becoming more common and the insurance fallout hitting households, it’s time that policymakers reconsider the way they manage risk, Caroline Schuster writes. 

With claims of denials from insurance companies emerging in bushfire affected areas, anger is simmering among the community about uninsured losses from the fires.

A widely shared Facebook post from Choice, an independent consumer advocacy group, underscored the complex exclusions arising from the definition of ‘fire’ in home insurance policies, something the companies may use to deny claims.

But why should it be up to companies to define terms like fire damage, and leave families to shoulder the costly burden of repairing the damage on their own?

Exclusions that seem unfair and arbitrary are only one dimension of the effect of disasters like the bushfire crisis on family budgets. Even when insurance pays out as expected, it can be a major financial blow to a household.

More on this: Redistribution of risk and the climate crisis

I see this every day on my drive to work. The catastrophic hailstorm that hit Canberra last month has left the city with a vast graveyard of derelict vehicles parked by the airport. Thousands of families didn’t have full coverage and are facing large excesses. My own household is down to one car, as we figure out what to do about an insurance payout that won’t even begin to cover what is still owed on the wrecked vehicle’s financing.

Global climate trends are alarming for the insurance industry. SwissRe, the largest global reinsurance company, has noted the rise of so-called ‘secondary perils’ linked to extreme weather events. These present a serious challenge for the industry and for policymakers.

Secondary perils can be independent small-to-medium size events, like drought and wildfire outbreaks, or the secondary effects of a primary peril like a tropical storm. In 2018, more than 60 per cent of the $76 billion of losses associated with natural catastrophes were due to secondary perils. The greater occurrence of extreme weather and the state of flux in highly localised conditions is likely to lead to even higher levels of uninsured losses in the coming years.

The fact is, without change, households will be forced to make their own decisions about many environmental risks, and make financial choices accordingly. Then, people will be penalised if those choices are ‘wrong’ – if they are underinsured, or haven’t read the fine print, or bought the wrong policy, the costs will be great. How do policymakers tackle this?

More on this: What do bushfires mean for Australia’s water supply?

Some laudable solutions, like revenue-contingent loans – think HECS for mortgages or small business loans – could fill in the insurance gap.

Revenue-contingent loans can make repayment affordable while helping governments keep their budgets sustainable. Even so, better financing to supplement insurance in bushfire afflicted communities has its limits.

The reality is, these policy solutions still think of the households as ‘shock-absorption mechanisms’ that can manage risk in uncertain times, and this represents a broader problem.

The household has become ground zero for mitigating a whole host of risks.

Whether it be using equity from the home to confront a medical crisis, investing wisely to pay for the rising cost of higher education, buying an investment property to supplement retirement income, or outsourcing paid childcare. Now, the unknown risk models of climate hazards are a household burden too. The multiple insurance products held by most families are a piece of this larger financial puzzle.

As communities struggle to rebuild, policymakers should consider whether financial solutions like private insurance are enough. Should the financialisation of the home be the solution to the threat of mega-fires – a threat that we are just beginning to understand?  Are we all ‘citizen-speculators’ who must gamble on these ‘secondary perils’ and hope for the best?

The multiple catastrophes that have hit Australian households this year should be treated not only as an environmental justice issue, but also a question of the role of the household in society. They are a feminist issue, and should lead policymakers to question exactly what risks have been outsourced to the home, and how the family has been recast as a financial agent, including at the front line of climate risk.

Feminist research and policy has fought to draw attention to underlying social dynamics that allocate time, care, income, and wealth within families. It is high time to add climate hazards to the mix.

There are alternative solutions to this. Rather than privatising risk, and outsourcing it to the household as a domestic concern, policymakers must seek collective and public strategies that deal with the ‘secondary perils’ of climate change.

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