Why countries need insurance too

Would you pay more GST if it meant you could be more like an ant than a cicada? 

During the wintertime, an ant was living off the grain that it had stored up for itself during the summer.  A hungry cicada came to the ant and asked him to share some of its grain. The ant said to the cicada, ‘Why didn’t you lay up food during the summer?’ The cicada replied, ‘I didn’t have time. I was busy singing.’ The ant laughed at the cicada’s reply, and hid its heaps of grain deeper in the ground. ‘Since you sang like a fool in the summer,’ said the ant, ‘you can try dancing in the winter!’

The recent floods are the latest in a series of disasters inflicted on us by nature – and it will not be the last.

Leaving aside climate uncertainty, we know that Australia is a land of extremes. We have seen that in the last few weeks, with the east coast under water and the west suffering from large scale bushfires and drought. We saw it in Victoria last year and in Canberra in 2003, when fires burnt hundreds of homes and businesses and took many lives. These floods are especially disastrous, perhaps necessitating reconstruction costing around $5 billion.

As is always the case in Australia, the bulk of the cost of fixing the huge damage caused by the floods will be largely borne by taxpayers – the present generation of taxpayers. Yes, insurance will cover some of the damage and individuals and businesses will carry some of the burden also, but one way or the other most of the cost of reconstruction will be put on our collective tab.

By the way, this is as it should be, because the nation is the entity best placed to carry the risk and to reap the rewards of re-building. This is not the issue of policy I am discussing today. My concern today is that it is unfair and unwise to place the risk entirely on the shoulders of those who pay tax now. There is a better way, if we emulate the ant, rather than the cicada.

After all, this is not how we run our lives and our businesses. We (most of us) set aside funds, through the mechanism of insurance, to spread the risk both across time and across several parties, as insurers themselves take out insurance. This means that when disaster strikes, the cost of making good is not borne solely by the affected individual, family or business and it is not paid entirely from funds held at the time. This means that the cost of the disaster is not as big a burden as it would be otherwise and that people are more likely to take out insurance, thus broadening the pool of parties that share the risk and making the portion of the burden borne by each party smaller and smaller. This is a virtuous cycle.

But when it comes to natural large scale disasters, we turn into cicadas. Why is this? It is inevitable because of how the system works now. Some people take out insurance and some of those people take out inappropriate and inadequate insurance – either to save money or because of the insurers’ talent for crafting fine print restrictions. Some people do not take out insurance at all and gamble on fate and the good will and purses of others, should fate fail them. And the nation takes out no insurance at all – relying instead on the flexibility of consolidated revenue – in other words, asking taxpayers to pay. This means that those of us who pay for insurance pay twice, by the way, and that over the years the pressure to join the ranks of the uninsured gamblers grows. This is not a virtuous cycle.

In the 1970s, the Whitlam Government proposed a national rehabilitation and compensation scheme – and a national superannuation scheme too. Both proposals were blocked by the Coalition controlled Senate, which railed against these socialist schemes that would cost taxpayers millions of dollars.

I find it interesting that supposed supporters of free enterprise should consider insurance to be a socialist idea, when in fact it was born during and out of a period of rampant mercantilist capitalism. I also find it curious that taxpayers should be denied the opportunity to save themselves a considerable amount of money by spreading the damage from disasters more broadly. If we had established a national rehabilitation and compensation scheme, it would have provided a platform to establish a wider scheme, covering national disasters.

Our cousins in New Zealand have a national scheme to deal with damage caused by earthquakes and it seems to be working well, if the aftermath of the recent Christchurch earthquake is in any way illustrative of how the scheme works. In 1944 the Earthquake and War Damages Commission (now the Earthquake Commission) was established as the country’s insurer for earthquakes and other natural disasters.

But we Australians seem determined to behave more like the flighty cicada than the virtuous ant in the fable, always keen not to set aside wealth for a rainy day, so that we can spend more on essentials such as big screen TVs and second-rate cricket teams.

My proposal is simple. Let us establish a national disaster compensation scheme, the management of which should be made contestable, to keep everyone honest, as is done in the hotel industry.

The scheme should be funded by a levy on us that is matched dollar for dollar by the national, state and territory governments. My preferred way would be to stop all funding to sport for ten years, which would raise between twenty and thirty billion dollars. However, I know I am dreaming!

The simplest way to collect the levy would be by increasing the GST by one per cent for three years. That would raise between 21 and 25 billion dollars, at least. The matching government contribution would be funded by selling government disaster bonds, bonds with a very long life of say twenty-five years, matching the risk profile of the investment.

This means that within three years the national disaster fund – which should be managed by the Future Fund – would have around 50 billion dollars to invest. Assuming a modest rate of return, say 4.5-5.5% above the rate of inflation, which is the Future Fund target, there would be a return of between 3 and 4 billion per year. That would be enough by itself to deal with most disasters, without touching the capital. A portion of the earnings should be dedicated to disaster proofing work, such as raising highways, building levees and so on.

If we did this, at the cost of paying 1% more GST for three years, we would insure the nation and ourselves against future disasters forever, without ever having to put our hands in our pockets again. What do you think?

Patrick Callioni is a former senior public servant, with the Queensland and Australian Governments, and is now the Senior Executive Advisor, Domestic and International Markets, with the Sustain Group www.sustaingroup.net.  His books Compliance and Regulation in the Financial Services Industry & Waves of Change: Managing Global Trends in the Financial Services Industry are available at Amazon