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Avoiding economic disaster: the true value of insurance

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We see plenty of good news stories showing how insurance companies help get individual homeowners or businesses back on their feet following a natural catastrophe.

Less well reported is the overall impact of insurance on a region’s GDP after disaster strikes.

A report from SGS Economics & Planning, commissioned by Suncorp, proves insurance plays a critical role in economic recovery, particularly in vulnerable or badly hit regional areas.

And this, the insurer says, reignites the debate over the importance of disaster mitigation spending. Because if – as predicted – severe weather becomes increasingly common, some regions may be heading for ruin.

The report examines three insurance catastrophes of varying size: 2017’s Cyclone Debbie, Hobart’s flooding in May last year, and the Tathra bushfires in March last year.

The three incidents resulted in 20,000, 2000 and 200 Suncorp claims respectively.

SGS examined each case to assess the impact of Suncorp’s insurance on economic recovery.

Cyclone Debbie made landfall near Airlie Beach on March 28 2017.

Direct economic losses have been estimated at $3.5 billion, with significant damage to infrastructure, properties, crops and the tourism industry. It is believed to be the most expensive storm in Queensland’s history.

In 2017 the economic impact of Debbie was estimated to be a $7 billion reduction in GDP, representing a 2.2% drop in the areas affected. The Whitsunday Islands was the worst hit area, with a 64.2% GDP reduction.

Suncorp paid more than $543 million in insurance claims, with household claims accounting for almost three-quarters of the total.

The report finds that during 2017 Suncorp claims and recovery activity boosted the economy (compared to a scenario of no insurance payouts) by more than $2.7 billion (0.8%). In the following year an additional $1.9 billion was added to GDP (0.6%). The cumulative economic impact over five years is estimated to be $6.1 billion.

In the Whitsundays, Suncorp’s claims and recovery activity injected more than $285 million. Without Suncorp payouts, the Whitsundays would have suffered a permanent GDP loss of 23%.

“This is often the case for regional areas that have a narrower economic base and more limited employment opportunities compared to larger urban areas,” the report says. “As such, Suncorp insurance plays a more significant role in mitigating adverse outcomes and helping to restore normal economic activities.”

The Hobart floods were on May 11 last year, generated by an intense low-pressure system that brought a combination of heavy rain, wind and thunderstorms.

Last year the economic impact of the floods was estimated to be a $908 million (7.5%) reduction in local GDP.

Suncorp paid out $8.9 million in insurance claims and recovery activity. The report finds that, during the year, Suncorp payouts boosted the economy (compared to a scenario of no insurance payouts) of Hobart by more than $94 million (0.5%).

This year, as the stimulus of insurance payouts continues to flow, an additional $47 million will be added to GDP (0.3%). The improved economic performance will continue until at least 2020.

Bushfires broke out around the NSW south-coast town of Tathra at about noon on March 18 last year, and spread quickly as temperatures hit 37 degrees.

There were five separate fast-moving fires, driven by hot and dry winds, and residents had little time to react. More than 1250 hectares were burned and 65 homes destroyed, along with 35 caravans and cabins.

Last year the economic impact of the Tathra bushfires was estimated at a $207 million (33.7%) reduction in GDP. As of last August, Suncorp insurance had paid out $6.9 million in claims, adding $4 million to the local economy.

Overall, in the first 12 months following Cyclone Debbie, Hobart’s floods and Tathra’s fires, the estimated economic boost from Suncorp’s claims and recovery activity was $2.8 billion (0.8% of GDP).

This may seem like a small percentage, but as Suncorp CEO Insurance Gary Dransfield tells insuranceNEWS.com.au, it’s a small percentage of a very big number.

Remember, these figures are just for Suncorp – not the insurance industry as a whole.

“As was the case with the Whitsundays, without insurance, it is possible that a town’s economy may never fully recover from a natural disaster, since damage leads in some cases to a permanently impaired productive capacity,” the report says.

Mr Dransfield says the report shows insurers have a responsibility not just to individuals, but the wider economy.

And there is a clear onus on governments to invest in mitigation.

“We will keep hammering away at that,” he told insuranceNEWS.com.au. “There is an opportunity with the incoming federal government to reinforce the message.

“There is a clear economic case to invest a significant sum each year.”

The report concludes that the importance of insurance is increasing as our climate changes – especially in regional Australia, where there is a narrower economic base. But if insurance is vital, so too is long-overdue mitigation work that keeps it viable and affordable.