Productivity Commission Inquiry Report (The Report) No 74, 17th December 2014

Key Points (extracted from The Report)

  • Australia is exposed to natural disasters on a recurring basis. Effective planning and mitigation of risks is an essential task for governments, businesses and households.
  • Current government natural disaster funding arrangements are not efficient, equitable or sustainable. They are prone to cost shifting, ad hoc responses and short-term political opportunism. Groundhog Day anecdotes abound.
  • Governments overinvest in post-disaster reconstruction and underinvest in mitigation that would limit the impact of natural disasters in the first place. As such, natural disaster costs have become a growing, unfunded liability for governments.
  • The funding arrangements matter because they impact the incentives to manage risks, including by using potent but politically challenging levers like land use planning. The reform imperative is greatest for states most exposed to natural disaster risk, like Queensland.
  • The recommended reforms comprise a coherent policy package across recovery and mitigation funding, budget treatment of recovery costs, and accountability requirements for all governments. ‘Cherry picking’ component parts would see the much needed balance between mitigation and recovery, as well as greater state autonomy, remain elusive.
  • Australian Government post-disaster support to state and territory governments (states) should be reduced, and support for mitigation increased. Greater budget transparency and some provisioning is also needed.
    • States need to shoulder a greater share of natural disaster recovery costs to sharpen incentives to manage, mitigate and insure against these risks. The Australian Government should provide a base level of support to states commensurate with relative fiscal capacity and the original ‘safety-net’ objective of disaster recovery funding, with the option for states to purchase ‘top-up’ fiscal support.
    • Australian Government mitigation funding to states should increase to $200 million a year and be matched by the states.
    • These reforms would give state and local governments autonomy in how they pursue disaster recovery and mitigation. The reforms should be supported by performance and process based accountability mechanisms that embed good risk management.
  • Governments have a role in providing emergency relief payments to individuals seriously affected by natural disasters, to defray immediate economic and social hardship. Such relief should be provided in a consistent, equitable and efficient way.
  • Governments can do better in terms of policies that enable people to understand natural disaster risks and also to give them the incentive to manage the risks effectively.
    • Information on hazards and risk exposure has improved significantly in recent years, but there are opportunities to improve information consistency, sharing and communication.
    • Regulations affecting the built environment have a significant influence on the exposure and vulnerability of communities to natural hazards. While building regulations have generally been effective, there is a need to transparently incorporate natural disaster risk management into land use planning.
  • Insurance is an important risk management option. Insurance markets in Australia for natural disaster risk are generally working well, and pricing is increasingly risk reflective. Insurers can and should do more to inform households on their insurance policies, the natural hazards they face and the indicative costs of rebuilding after a natural disaster.


Total economic cost of natural disasters in 2011 averaged $6.3billion, extrapolating that data to 2030 shows a doubling of cost reaching an average of $23billion per annum by 2050 if left unchecked!
Major national natural disaster funding arrangements for the period 2009 – 2013 are shown in the following diagram extracted from The Report. This highlights the reactive nature of expenditure from both central and regional government. Only 2% of expenditure is spent on mitigation whilst 98% is spent on disaster relief/recovery. Turning these ratios around must surely produce a more cost effective outcome.

Role of Insurance

Price signals provided by insurance can encourage risk mitigation. The insurance industry plays a role in communicating levels of risk to policy holders and can encourage and support risk mitigating behaviour by households and businesses through incentives such as reduced premiums and/or excesses.

Large scale mitigation through flood mitigation and building code improvement leads to lower premiums however evidence suggests that mitigation measures undertaken by households may not always result in lower premiums, particularly where insurers have limited information about the vulnerability of individual properties to natural hazards.

Partnerships between industry and state/local governments are without doubt the best way forward sharing expertise and knowledge:

  • governments sharing natural hazard data that they already hold and land use planning and mitigation to reduce risk exposure and vulnerability
  • insurers sharing expertise and information (for example, claims data) to inform land use planning and mitigation decisions
  • collaboration to inform households of the risks that they face and to encourage private funding of mitigation through incentives such as reduced premiums.