The Theory and Practice of National Natural Disaster Insurance: Program Design Implications from an Australian Perspective

Abstract

Many countries have adopted national natural disaster insurance to address the purported deficiencies of private insurance markets in coping with a range of natural disasters, including floods, storms, bushfires, hurricanes, cyclones, tsunamis, and earthquakes. Almost uniquely among developed countries, Australia lacks a national natural disaster insurance program. In response, and in light of several recent and particularly severe floods and cyclones in Australia, some have called for the establishment of a public sector insurance provider of some form to address concerns with the availability and affordability of property insurance in the context of natural disasters. The purpose of this paper is to inform this process in Australia and elsewhere by first discussing the underlying theory and practice of national disaster insurance programs by outlining specific roles for government in disaster insurance. It then reviews selected programs representative of these roles in Japan, Spain, France, the US, New Zealand and Turkey. Finally, the paper examines some of the program design considerations from an Australian perspective. We conclude that there is currently no convincing need for national natural disaster insurance in any of its possible forms in the Australian context.

Keywords: natural disasters, national disaster insurance, moral hazard, adverse selection

JEL Classification: G22