Australia’s Catastrophe Crossroads

Natural disasters belted parts of Australia and New Zealand this summer. As affected people of Queensland and Christchurch begin to rebuild their lives, and governments and insurers tally up the costs, there has been speculation about whether this episode of nature’s fury warrants a domestic catastrophe bond market. MIRANDA WARD reports.  It will be some time until reinsurers determine whether the earthquake that hit Christchurch on February 22 was a standalone seismic event, or an aftershock from the quake that rocked the city in September 2010. In other words, it will take weeks to determine who, be it reinsurance companies or the New Zealand Government, has to foot the multi-billion dollar damages bill.

Similarly, the Australian Government is embroiled in controversy over its one-off levy to fund the restoration of towns and cities damaged by summer flooding in Queensland. This has spurred major reinsurers to call on the Australian government to think long-term and issue catastrophe bonds instead of slugging taxpayers each time Australia is hit hard by a natural disaster. But is Australia suited to this form of insurance securitisation? As the nation’s population increases and becomes concentrated in major cities and the eastern seaboard, the potential human and economic impact of a natural disaster hitting these highly populated areas – which are areas of productivity and wealth – is rising every decade, says John Seo, managing principal at the Connecticut-based catastrophe bond specialist, Fermat Capital Management. Seo says a natural disaster becomes a human catastrophe when people “clump up” in an area, and with more than half of Australia’s population living in major cities – 68 per cent of the population, according to 2006 census data – we are running out of time before the “big one” hits.

Likening the need for a consistent governmental approach to insurance and reinsurance with national defence, Seo says it would be a real shame for Australia to dismiss catastrophe bonds as unnecessary once the shock and impact of the current crises blow over. “It takes a crisis to reveal underlying structural issues, and you hope that those issues get addressed and fixed long after the crisis has passed,” he says. “That’s the crossroad Australia is at.” If this problem doesn’t get solved this time around, Australia will have to wait until the next, potentially worse, crisis. And it’s too late to seek the coverage after the crisis has struck. This is why Mark Senkevics, the head of Swiss Re in Australia and New Zealand, is calling on the Australian government to adopt a more “pre-emptive approach to financing disaster relief ”. He has suggested the government cover the rising damages bill through the use of insurance instruments like catastrophe bonds as opposed to one-off disaster levies. “We would like to see some form of insurance from government rather than a levy after the event,” he says.