Is it sensible for governments to take out disaster insurance?

SA Senator Nick Xenophon is pushing the Commonwealth Government to force state governments to take out disaster insurance, in return for his support of the flood levy:

States may be forced to take out disaster insurance

This may not be sensible. Governments typically find it cheaper to self-insure against risks. Given their taxing powers and financial resources, they can effectively act as their own insurance company, in which case they don’t have to contribute to the profits of private insurers.

Instead of paying a premium to a private insurer each year, governments could set aside a similar amount of money each year to provide for natural disaster recovery when required. Assuming private insurers are estimating their potential liabilities for damages properly, and demanding a profit on their insurance activities, the amount of money private insurers would demand from governments over the years is expected to be greater than the total value of expected damage from disasters.

It makes sense for individuals and households to take out insurance for life’s risks, because a fire or life threatening illness could otherwise wreck their finances and lifestyles. But Australian governments wouldn’t get financially wiped out by natural disasters, and it’s more cost-effective for them to self-insure.

Forcing state governments to take out disaster insurance would represent cost-shifting by the Commonwealth on to the states in contravention of the established arrangements for sharing the costs of recovery.

The only defensible case for shifting costs on to Queenslanders is that, if Queensland is more prone to natural disasters, we should pay more because we willingly assume this risk. Rather than forcing Queensland to take out disaster insurance, a more cost-effective solution would be for the Commonwealth Government to require states that are more prone to natural disasters to meet a higher proportion of the recovery costs. This however would most likely be politically unacceptable, so we may end up with Senator Xenophon’s disaster insurance requirement as the path of least political resistance.

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