“Dig under that and ask what’s driving the sticker price of insurance, and up to 30 per cent of the sticker price of an insurance contract is the reinsurance cost,” Mr Jones said.
Climate change is driving up the frequency and severity of natural catastrophe events. According to Fitch Ratings, in the first half of this year insured losses worldwide hit $US53 billion ($83 billion), 47 per cent above the 20-year average. Last year was the reinsurance industry’s third most costly for weather-related events, after 2017 and 2005.
The reinsurers – mostly Europe-based giants who help customer-facing insurance companies manage their risk – have ratcheted up prices to protect themselves from the rising risk. And the insurers have had to pass that on through higher premiums.
Australia has been one of the worst-hit countries. And with cost-of-living concerns at the top of the Albanese government’s political risk list, Mr Jones wanted to find out if Canberra has any levers it can pull.
The government already has a $1 billion, five-year Disaster Ready Fund, and a Hazard Insurance Partnership that is supposed to advise officials on what actions will tangibly lower risk, and thus premiums.
But Mr Jones said the reinsurers had better datasets – magic black boxes that drive the prices they charge insurers, but that could also guide government action.
“If we’ve got a choice between spending $200 million on these 10 initiatives and the insurers say ‘that’s great, but it won’t make any difference’, or these other 10 initiatives, and they say ‘that’ll make a meaningful difference’, then let’s do the second group,” Mr Jones said.
When he asked the reinsurers what they were looking for, they were pretty clear. “They’re looking at what happens at community level: so is it dams, is it levees, is it better bridges, is it zoning and planning. Then at a household level, it’s building standards, it’s micro-mitigation.”
But the single most important take-out, which Mr Jones returned to repeatedly, was a simple one: don’t build anything more on floodplains.
“We’ve got to stop making the situation worse, by doing more of the wrong building in the wrong places,” he said.
“Us repeating the problem of building the wrong suburbs in the wrong places – the international reinsurers will look at all of that and go, ‘Australia is not learning its lessons’.”
Mr Jones is planning to plug these discussions into a cabinet deliberation on the topic either later this year or early next, while also awaiting the findings of a parallel parliamentary inquiry.
But clearly, there will need to be more effort and probably more money.
“We spend over 90 per cent in clean-up [after disasters], and less than 5 per cent in mitigation. We’ve got to flip that.”
He will also take a closer look at a British government initiative called Flood Re, where the government works with insurers to underwrite home insurance in high-risk areas.
“We’ll go away and think about that. A government intervention in part of the underwriting – it’s not the first place I’d go, to be honest. I’d want to look at other things,” he said.
But even if the cabinet and parliamentary processes gee up a campaign of mitigation and adaptation, Mr Jones acknowledged this may take time to filter through to premiums.
He said he had asked the reinsurers how soon a mitigation effort would be reflected in their modelling. “The answer to that was ‘not soon’. So that means we need to do more, and our insurers need to do more,” he said.
“For us to be separated from the pack, in the way we are traded in the reinsurance market, will require us to do different things in the mitigation process.
“I’ve come away from this more convinced than ever that the sensible and enduring interventions are all aimed at reducing the underlying risk, instead of masking it or pretending that it doesn’t exist. Because you pay for it one way or another.”