Blog(Click here to get to the blog overview page)

Building Resilience in the Face of Adversity

With the pairing of continuing bushfires and the ever-growing concern around climate change, Australians are likely concerned about what the next three months will bring – heatwaves, cyclones or severe storms.  

These costly natural disasters are predicted to become more regular - climate modelling evidence shows a potential doubling of El Niño occurrences in the future in response to greenhouse warming - bringing the question of resilience into stark reality.  

Resilience is a powerful word and one that raises many questions. How can we as a nation, an economy and indeed an industry, improve our resilience in the face of adversity?

Insurance plays a central role in building resilience. It frees up capital, it mitigates against financial loss, provides long term financial stability and can be a substitute for government programs.

Less than 12 months ago floods devastated the North Queensland city of Townsville, resulting in insured losses of over A$1.2 billion. The massive Queensland floods of 2010-11 resulted in more than A$2.4 billion in insured losses. A significant amount of non-insured loss was post-funded by the Australian Government via a flood levy on taxpayers to cover the cost of repairing the damage wrought.

These are not insignificant numbers. At the time, then Prime Minister Julia Gillard cited Australia’s strong economic growth as a reason taxpayers could afford to pick up the tab. Australia’s ability to weather the shock of such a large-scale natural disaster reflected what Swiss Re defines as its relatively strong macroeconomic resilience. Not so the case nowadays.

Nine years later, Australia has increased government debt; sluggish wages growth and an anaemic economy, restrained by an agriculture sector devastated by the worst drought in over a century. The International Monetary Fund has warned of a global economic slowdown to the pace unseen since the 2008-09 GFC.

Australia’s ability to absorb another string of natural disasters is very different from 2011.

According to the Macroeconomic Resilience Index, developed by the Swiss Re Institute (SRI) and the London School of Economics (LSE), Australia is not alone. The Index, released in September, defines resilience as the capacity of an economy or society to minimise income and asset losses resulting from shock events, and shows the global economy is less resilient than 10 years ago.

The main drivers of this decline in macroeconomic resilience are lack of structural reforms; exhaustion of monetary policy options and weak banking sectors.

The Swiss Re Institute warns the Index, viewed against the current slowdown in many economies, raises questions about countries’ abilities to avoid future shocks.

It looks at buffers like fiscal space – defined as how likely a country is to face fiscal distress as the result of a major economic shock (e.g. natural disaster) – and monetary policy space – the ability and effectiveness of interest rate cuts and qualitative easing to absorb shocks.

Then it assesses structural components such as access to talent; insurance penetration; economic complexity and the health of the banking sector.

The good news for Australia is that its aggregate resilience has improved slightly since 2007. Australia’s strong banking sector (despite recent setbacks) and proximity to and economic links with China helped boost its index score.

The Swiss Re Institute has developed separate Insurance Resilience Indices to measure a country’s micro resilience, which represents the vulnerability and ability of individuals and households to withstand shock events in three areas  – natural catastrophes, mortality (death of a household’s main earner); and significant health expenditures.

In terms of micro resilience to natural catastrophes, Australia and New Zealand lead the world, mostly due to high penetration of earthquake cover in New Zealand and standard coverage for most natural catastrophes in Australian property insurance policies.

However, insurance affordability has become a hot topic given the regular and extreme events we've witnessed recently and what role government and industry play to improve resilience, rather than simply facilitating the unsustainable cost of recovery.

So how can Australia boost its economic resilience?

  1. Increased risk transfer by the public sector to insurance markets, which boosts macroeconomic resilience by facilitating stronger recovery after a shock event.
  2. Through best practice loss mitigation measures. These include better building standards in areas prone to severe tropical cyclones; or fire protection in areas of high bushfire risk.

A major lesson from the Townsville floods and the Queensland floods of 2010-11 was that local governments allowed homes to be built on flood plains.

Better planning laws and building standards, mixed with flood mitigation measures such as flood levies around townships, increases insurance penetration and takes pressure off taxpayers to pick up the tab.

Roma is one example where the benefits of mitigation were applauded. After suffering floods in 2012, a levee was built around the town and put 500 properties on a level playing field when it comes to insuring their homes.  The investment delivered immediate economic benefits by lowering insurance premiums for those protected by the levee, while providing future economic resilience by protecting against future physical damage.

Alongside this, individuals and businesses need to take a more active role understanding their own risk profiles and construct their homes; offices or facilities to mitigate those risks or ensure they have the correct insurance cover.

It is up to governments at all levels, regulators, insurers, businesses and consumers to tackle many of the barriers to insurance contributing fully to economic growth and resilience. As a reinsurer, we understand why it's so important – it's at heart of everything we do – and as a nation vulnerable to catastrophes and climate change it's even more vital to build our resilience, and as we face the high risk summer months, the time is now.