Australian states told to take out disaster insurance

Australian states have been told that they can no longer rely on Commonwealth aid alone in the event of major natural disasters. The 30 year old natural disaster relief arrangements are to be rewritten following a government agreement yesterday which will state that the amount of relief given to states after a disaster will be contingent on their own insurance arrangements.

The question of disaster relief has become a high profile issue in Australia after the recent Queensland flooding. A $1.8 billion flood levy tax has now been approved for Queensland, but only after agreement that it would be the last and that in future Commonwealth and government relief will only be provided if the states have their own disaster insurance arrangement.

The changes to the law seeks to prevent taxpayers being exposed to paying for disaster relief. Major changes to the disaster relief arrangements will effectively force each state government to obtain their own natural disaster cover for public assets such as government buildings, schools and infrastructure. States will still be eligible for the Commonwealth disaster relief if they can show that they have fully assessed and hedged their own disaster risks.

There will be opportunities  and challenges for the reinsurance industry to help state governments achieve the right mix of disaster risk management and transfer through traditional reinsurance and also capital market risk transfer arrangements. The new agreement could also lead to the creation of a catastrophe facility for Australian states.