By Cath Vallence

The areas of Cardiff, West Newcastle and Hamilton were badly affected by the flooding, but the township of Wallsend was worst hit by a lack of appropriate insurance cover. Hunter Business Chamber Chief Executive Doug Parrish told Insurance & Risk Professional the extent of non-insurance in smaller communities is a huge problem.

"Wallsend is a small township that has suffered a raging torrent of water going through it, and the psychological and physical damage is immeasurable," he said. "In Wallsend you see many sole traders or small businesses that are either owned or leased, and they don’t have insurance – it’s heartbreaking."

Mr Parrish knows of many cases in which landlords of small and medium­sized enterprises("SMEs") are either under-insured or not insured for storm damage. "This is tough for their small business tenants, who had a significant portion of their life savings tied up in the goodwill of the business."

The Federal and NSW Govemments jointly funded recovery grants of up to $15,000 for eligible small businesses and primary producers, and the SW Rural Assistance Authority ("RAA") administered them. Federal Small Business Minister Fran Bailey says the grants help with urgent clean-up costs such as the hire of equipment to remove debris, essential repairs to fittings and other basic restoration tasks. The RAA administers national disaster loans charged at a concessional rate of 2.85%, and both governments announced the establishment of two $500,000 community recovery funds to help local communities in the region, including SMEs and tourism initiatives.

It is estimated that of Australia’s 7.7 million households, 23% or about 1.8 million do not have a building or contents insurance policy.

The Insurance Council of Australia ("ICA") recently commissioned Richard Tooth and George Barker of the Centre for Law & Economics at the Australian National University to review the problem. Their report, ‘The non-insured: Who, why and trends’, uses data from Roy Morgan Research and the Australian Bureau of Statistics ("ABS"). The data supports the finding that States with higher tax rates on insurance premiums have higher rates of non-insurance for both building and contents insurance.

NSW, Victoria and Tasmania continue to apply a fire services levY ("FSL") on building and contents insurance, adding 34% to 47% to insurance costs. The report says there is a notable gap between rates of non-insurance in these States and those that do not have such a levy. "This gap in the rate of non­insurance appears to occur across age group, income profiles and stages of life. The effect of State taxes is much more noticeable for contents insurance, consistent with the view that households are more price-sensitive with regard to contents insurance."

According to the Roy Morgan Research data, the removal of the FSL in Western Australia in 2004 brought about a decline in the rate of non-insurance for building and contents, while the rate climbed elsewhere.

Even more damning about the effect of State-based insurance taxes, the report says imposts on insurance premiums cause several distortions in consumer behaviour. "In responses to higher taxes, people may simply not purchase insurance, in effect choosing to self-insure. In this case, all else being equal, we would expect to see a low take-up of insurance when and where insurance taxes are higher." Another effect is that people may respond to higher insurance taxes by reducing their level of cover or by increasing their excess, thereby reducing the insurance premium.

State taxes on building and contents insurance in Australia are substantial, ranging from 18% to 47% on top of premiums. The study supports the view that demand for contents insurance is more price-sensitive than for building insurance. This stems from analysis of variation in taxes between jurisdictions and across time, and of Roy Morgan Single Source and ABS data.