Monday, February 16, 2009

Bushfire insurance

I was intrigued to learn from a current affairs show that those insured in the bush-fire crisis paid about 40% of their property insurance premiums to government to fund the CFA. Those uninsured - there were many - paid nothing to the CFA but, of course, received the assistance of the CFA during the crisis.  Ken Parish at Troppo* points out that so far each of those made homeless has reason to expect $15,000 in community-provided charitable reflief as well as government assistance and insurance payouts.

The moral hazard implication here is to underprovide adequate fire protection and to enjoy the experience of tree-changing without paying the real economic costs of doing so. It is deeply troubling and has disastrous social implications.  Unqualified sympathies go out to those who have died and are injured or have lost property - this is unequivocal.  I am not criticising these people at all. This is a shocking disaster that rightly touches the soul of our nation. But these unfortunate people are suffering - some have died - partly because society is sending out the wrong cost signals for lifestyle decisions.

The sorts of negative externalities that arise here must be internalised. Those living in high fire risk areas must pay for the expected costs of choosing to live there - not for reasons of distributive justice which are irrelevant and trifling here - but in order to induce the appropriate degree of risk aversion.   The monetary subsidies are irrelevant in the scheme of things - nothing compares to loss of life or the hell of loosing your home - but the current policies induce inappropriate risk-taking.

They also induce excessive risk-taking by local government and the green movement and excessive encroachment on green areas by those seeking environments with low population density. I am unsure that local councils should revise rules on tree-clearing. The appropriate resolution may be to deny humans the right to live in these areas entirely - or to charge appropriately large prices - rather than to force human settlements to extensively tree clear in order to protect themselves. An issue remains to protect the environment - it is not only about the rights of people.

It is amazing to me that people in the fire zones plant trees that even touch their homes - they are inviting disaster and I wonder why they do this.  Is it due, again, in part to the wrong signals being sent out on the consequences of catastrophic fire?

Of course insurance premiums can and will rise. They should too.  Forget Rudd's populist attacks on the insurance companies - higher insurance premiums here will send out a valid social message. All residents of such areas should pay insurance costs for CFA protection by (for example) their rates not via an optional payment to property insurance.

A starting point for reform is to fully internalise the costs faced by households in setting up in disaster-prone areas.

* I would have made this comment at Troppo had their inept comments regime functioned. I tire of trying to comment at Troppo.

9 comments:

Spiros said...

Harry

I agree with much of what you say. The funding of the CFA should be taken out of the insurance premiums, and added to council rates.


"I wonder why they do this."

The same reason people smoke. They systematically underestimate risks. Psychologists can tell you all about it.

This means that some people will recklessly not insure their house and contents. And when disaster strikes, society will rescue them. House insurance should be compulsory, just as medical insurance is compulsory. (You can't opt out of Medicare, for good reasons.) And not just for people who live in flood or fire prone areas. That would just invite a heap of 'where do you draw the line?' problems.

observa said...

'House insurance should be compulsory'
Whoa there Spiros! You want all of us to cross subsidise people who want to live right up close to flood and bushfire? I note that same program elicited the info that about 25% of Victorians were currently uninsured. Have a guess where most of them would be located and don't insure because they don't like the current premiums that are about to get prohibitive for many more? (My renewal just jumped 20% no doubt due to the GFC impact) Compulsory home insurance will eventually mean Govt monopoly like Workcover, CTPP and the like and we know where that leads us all. I like it the way it is. You can't afford to insure, you can't afford to live there so sell up to someone who can afford to meet insurers' risk return parameters. Insurers are simply the messenger.

rog said...

I think that it was that 40% of premiums in Victoria are govt charges which include a fire levy and 25% of property in Victoria is uninsured, the highest in Australia

rog said...

Following on I see that Vic charges 44% fire service levy + GST + stamp duty on the sum of the parts incl GST

LINK

Francis Xavier Holden said...

I agree with most of what you say.

Don't be so grumpy about Troppo login - it's no more difficult than here - unless you want to go anon I guess.

iPhone Insurance said...

The economics of what you are saying make clear sense. Do local councils not have economist advisors?

One of the main impoortant elements (as ever) seems to be a lack of education to the risks of fire-zone occupation, and how to mitigate those risks (eg dont grow trees right next to or anywhere near your property)

What centralised and mandatory education is there?

iPhone Insurance dude

lucy tartan said...

For some reason I can't quite put my finger on your post doesn't make me angry whereas Ken's did.

Some of the charity will be received in the form of grants for funeral expenses, which I don't think comes into quite the same category as basically bailing people out for not insuring.

House insurance is compulsory if your property is part of a body corporate.

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Paul said...

Here, here Harry, I totally agree.

observa - this is Australia, are you not used to providing subsidies to those in the bush... we already subidise via higher phone rates and higher road taxes, etc etc. The only rational reason to provide such subsidies is if we get an economic benefit from those areas eg farming. IMO the cost of the subsidies is far and away higher than the economic benefits because of interlopers who chose to live in those areas for lifestyle or cost reason but don't return any economic benefit.

I seriously doubt that the councils will do the right thing of imposing a fire levy on everyone. Why? It isn't in their interests as it will make those places less attractive to live (for cost reasons) and so they will have less people, which means less money, and less services. Which feeds even higher council rates...and so more people leave.
Only the state government could impose such a levy, as their interests are aligned whether people move between councils in the state.
Stay = pay the levy = the govt bails out less from its own pocket
Go = the government bails out less from its own pocket as it is one less person to assist

I heard some chatter in the media about providing less assistance to those who were prudent and had insurance. Hopefully they don't (didn't) do this, as it will only encourage more people not to pay for insurance!!!