The recent devastation in Queensland and Victoria has stirred debate over government insurance policies and the complexities surrounding the issue.

Queensland, we now know, is one of four states and territories that doesn’t insure its assets. Questions have also been raised over how private insurance and government support could be better managed to provide more assistance to communities in need. And whether in the future states who chose not re-insure should receive equal benefits from the Commonwealth.

During an inquiry into the government’s $1.8 billion flood levy last week, Queensland under-treasurer Gerard Bradley faced a torrent of questions about the state’s decision to not take out insurance.

Prime Minister Julia Gillard is relying on independent Senator Nick Xenophon to pass the controversial levy legislation after she secured independent Bob Katter and the Greens Andrew Wilkie’s votes last week. But Xenophon has been outspoken on the issue, maintaining he will only vote in favour of the levy if Queensland is forced to take out disaster insurance.

Treasurer Wayne Swan yesterday said Xenophon had raised a “legitimate question” telling Channel Ten’s Meet the Press: “It’s probably time for us to evaluate the proposal to see what the implications are for the future”.

The Queensland state government self-insures. What does this mean?

In essence, this is a risk management method in which you insure yourself by setting aside money to cover potential losses rather than by purchasing an insurance policy. For Queensland, it means they have to pay for damage to infrastructure it owns in light of a natural disaster.

Who is it self-insured by?

The Queensland Government Insurance Fund. Its insurance is outside the Commonwealth-state Natural Disaster Relief and Recovery Arrangements (NDRRA).

What is the NDRRA?

It is a joint Queensland and Australian government program that provides financial assistance after a natural disaster

Why does Queensland self-insure?

The Queensland government has said reinsurance isn’t cost effective with their history of natural disasters and the length of the state’s road network. “Queensland will have taken the view that self-insurance is cheaper,” senior lecturer at the Australian National University David Service told Crikey.

He said that for states such as Queensland, it is mathematically more sensible to self-insure: “If major events happen all the time, self-insurance is much more sensible.”

Rachel Carter, associate lecturer in law at La Trobe University, said by self-insuring the government avoids paying a premium each year: “Rather than pay a policy of X amount of money a year, they’ll save that money.”

Bradley told the inquiry last week the cost of private cover was not value for money and reinsurance arrangements do not generally cover road infrastructure: “We have considered the issue of reinsurance for our (self-insurance fund) but at the time we considered that, we didn’t consider that represented value for money for the state.

“As I’ve mentioned, 80% of the costs of this natural disaster relates to roads. So the availability in cost of seeking reinsurance for that infrastructure would be a major challenge.”

What state governments do re-insure their assets, and how much for?

According to The Sydney Morning Herald, NSW leads the nation with $3 billion of damage cover that extends to bridges and tunnels. It however does not insure roads, leaving it susceptible to paying huge damage bills.

Victoria has the second highest damage cover — insuring its infrastructure for $2 billion — including all roads, bridges, and tunnels. South Australia and Western Australia also have various forms of insurance policies, but Queensland, the territories and Tasmania do not.

Why the controversy over Queensland’s decision to self-insure?

Under the natural disaster arrangements, the Commonwealth pays up to 75% of the bill. During the inquiry last week, Bradley was questioned over whether Queensland’s decision not to seek reinsurance was made because under the arrangements almost all of the recovery costs would be paid for. He told Liberal MP Steve Ciobo: “We did not take that decision in relation to natural disaster events because of the longstanding arrangements which are in place for natural disaster at a national level.”

As insurance expert John Tsouroutis argued in The Australian Financial Review last week: “It’s not good policy because it creates an incentive for the states to hand over liability to a third party — in this case the federal government.”

How does this fit in with the debate over the flood levy?

Xenophon recently argued on ABC Radio’s The World Today the debate over the flood levy has generated a larger discussion over the necessity of state governments to take out insurance over their infrastructure assets. Queensland should take out insurance to protect the interests of taxpayers, he said: “Their premiums may have been a bit higher than in other states but there could still be a degree of significant mitigation in terms of financial losses in respect of damaged infrastructure if insurance was taken out.”

Xenophon reiterated on the weekend he would only support the levy if the government agreed to encourage all states and territories to take out their own insurance. He told the Nine Network: “If I support this flood levy I want to make sure this is the last time taxpayers have to pay a disaster levy.” he told the Nine Network.

The economics committee investigating the flood levy bill resumes today.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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