Government needs to do more say insurers

Preventative measures could have saved millions

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published January 9, 2013 1:32 pm AEDT

Insurers have warned governments at all levels that they need to step up efforts to mitigate the costs of natural risks and to prevent insurance premiums rising, not to mention limiting the loss of life.

According to Fairfax Media, Suncorp Limited (ASX: SUN) says in its Risky Business report that modest investments in flood or fire mitigation can significantly reduce the cost of disasters when they occur.

Related: Insurance price hike

More frequent extreme weather events, economic growth, urbanisation and population shifts towards higher risk areas have all combined to dramatically increase Australia's exposure to higher costs from natural risks.

The issue of taking preventative measures to limit disaster costs can be best illustrated by the case of outback Queensland town Roma, which put off plans several years ago to build a $2 million levee, to protect it from flooding. Suncorp says it has now the cost the government and private sector over $500 million dollars since, and the group stopped selling new insurance policies in Roma and Emerald, because of repeated flooding events.

Meanwhile, much of Australia is still suffering from record heatwave conditions, with the average temperature rising to over 40 degrees on Monday, according to the Bureau of Meteorology. Insurers continue to tally the cost of bushfires raging across south-eastern Australia. The Insurance Council of Australia said that 420 claims had been lodged so far, just for the fires in Tasmania, to cover losses estimated around $42 million.

Suncorp, QBE Insurance (ASX: QBE) and Insurance Australia Group (ASX: IAG) have all suffered under recent disasters such as the Queensland Floods in 2010, Cyclone Yasi in 2011 and hailstorms in Perth and Melbourne in 2010.

The Foolish bottom line

Insurers are in the business of making a profit. As natural disasters occur, insurers put up their premiums to cover their costs or cease to offer insurance at all, if they deem the risk too high. That's one reason why a rise in the intensity and number of natural disasters is not the end of the world for their businesses.

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Motley Fool writer/analyst Mike King holds an interest in QBE Insurance. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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