Features | By Amy Ripley
Counting the cost of the Australian bushfires
The Business School reinsurance expert urges governments and policymakers to think beyond the immediate impact of disasters.
Professor of Strategic Management Paula Jarzabkowski’s research focuses on the paradoxical social dynamics involved in using financial markets, particularly insurance and reinsurance, to address social and developmental goals.
She recently provided a media comment in which she argued that the Australian government and policymakers need to think beyond the immediate response to the bushfire crisis and consider how to rebuild communities afterwards.
“Insurance lets us pay for rebuilding in the aftermath of disasters and while nothing can bring back the personal and sentimental items lost, having the capital to rebuild your home is vital to rebuild lives and communities”, she says.
“The ratings agency AM Best considers the Australian insurance industry in good shape to pay such claims, supported by capital from the global reinsurance market. But in the longer term, this has serious consequences for what might be insurable, presenting the insurance industry with both opportunities and challenges.
“Much of the damaged land will simply not have been insured. For example, key unique ecological sites, such as Kangaroo Island will be in urgent need of funds to address whatever may be salvageable from an ecological perspective. There may be opportunities to develop insurance-based products to rebuild and protect the environment for both the species involved and for the tourism revenue this generates. We know unique insurance products have been developed to provide cash flow to reconstruct Mesoamerican coral reefs after the damage caused by hurricanes.”
Professor Jarzabkowski says it will be interesting to see if the summer 2020 bushfires are an opportunity for similar innovations, but the question of who will pay for them will be crucial.
“If it is a business or a home, the owner pays for insurance. But who owns the nature reserves and ecological sites and how can we pay for products to protect them? There are precedents in how we use insurance to support developing economies against drought, flood and hurricane, from which we can learn. Markets and global capital can be harnessed to help governments and international wildlife organisations to generate novel products that will support them to protect the environment.”
She says the fires may recur and while the damage to insured properties from this disaster are still relatively contained, because the fires have not gone through a city, we should still expect insurers to look carefully at how they price fire insurance in the future.
“The affected areas will be seen as higher risk so prices should be expected to rise. If we want people in fire risk areas to be able to afford insurance in the future, we will need innovative collaborations between governments and insurance markets to subsidise the pricing, which has consequences in itself. We will need to ensure that insurance payments are not just used to ‘build back’ but also to build back better, meaning in a more resilient way that can prevent loss or damage during fire”.
Professor Jarzabkowski warns that we need to understand the bushfires in the context of wider climate changes implications for insurance.
“We depend on insurance as a vital mechanism underpinning our economies. Without insurance you cannot get a mortgage on your home or take out loans for your business. But if disasters of such unprecedented scale and loss are becoming more frequent, then insurance will have to rise in price to cover the costs of the claims, which may make it unaffordable. If so, we will see serious economic impacts arising from under-insurance. It is therefore vital, in the face of growing catastrophe, that the insurance industry and governments work together to address insurance, insurability and the associated resilience we are going to need in our building and land use planning. The Australian bushfires are an important wake up call to us all, globally, about the implications of climate change on the economic safeguards we take for granted.”