We must get better at risk assessment. If you are reading this article, I am out of internet range somewhere off the Kimberley coast aboard Coral Geographer.
We took what many would think was a big risk in not getting travel insurance. It was going to be very expensive, so it was worth assessing the risk.
In the end the insurance was not going to provide very much.
Our health insurance includes ambulance cover which means medical evacuation was covered. That is a huge cost. The travel insurance would cover lost baggage, but if you lose your luggage the world does not end. Besides the premium was almost as much as the baggage was worth. The big risk was an accident or illness beforehand preventing us from travelling and losing the eye-watering cost of the cruise ticket.
The travel insurance quotes were essentially stinging us for the equivalent of international travel, which includes medical costs which in Australia are covered by Medicare and health insurance.
Now you might think that Covid was a risk that we should have insured against. Not so. If you get Covid the cruise-ship company prevents you from travelling and has to re-imburse you. More importantly, the fine print of nearly all insurance policies excludes coverage for big common catastrophes – things like flood, insurrection (remember 6 January in the US), acts of war, pandemics (Covid) or plague (the mice in NSW), so there is no point in taking out travel insurance for it.
A lot of people misunderstand the nature of insurance. They image that they insure an item or piece of property against its loss however the loss comes about. But insurance is not like that. You do not insure property against loss. Instead, you insure property against loss or damage caused by a set of defined events. If the damage is caused by events outside those defined events there is no pay-out.
My auntie’s house was destroyed in the London Blitz. She came out of the air-raid shelter with the clothes she was wearing and a toothbrush and house was gone. The insurance did not cover the loss.
Insurance companies are like that. In a way they are gamblers. But they are on the croupier’s side of the table which, over the long-term, does not lose. If necessary, they will change the rules midstream, by increasing premiums or excluding more and more events.
This is happening with private health insurance and with a whole lot of insurance associated with climate change, such as bushfires; floods and coastal erosion.
Insurance companies are especially good at excluding as much as possible of widespread loss from catastrophic events because those events present an existential threat to insurance companies.
I saw this in the Canberra bushfires of 2003. Some, though not all, insurance companies faced with multiple claims each in the hundreds of thousands of dollars strived to reduce payouts. They asserted that people had under-insured. So if the placed was insured for $300,000 and its insurable value was $600,000 and the damage was $100,000, the insurance company would pay just $50,000, by deeming that the property owner was the self-insurer for half the value of the house.
They are also good at creaming off low-hanging fruit to cross-subsidise other risks. Two examples jump out: car insurance and extended warranties. The statistics show that under-25-year-old males are nearly five times more likely to crash their car and when they do they cause four times the damage.But they do not pay 20 times the premium of older drivers.
Extended warranties are a major rip-off. Insurance companies prey on people’s fear that their consumer item will die shortly after the one-year warranty expires. But consumer durables are fairly well-made. They invariably last five years; that’s why they are called consumer durables. The extended warranty only covers major failure. The insurance companies get huge discounts when they, in effect, buy large numbers of consumer items to satisfy claims. In short, lucrative premiums and minimal pay-outs.
Moreover, despite retailers giving a contractual warranty of only one year, the Competition and Consumer Act provides that goods must be fit for purpose and that implies that the main parts of things like TVs, fridges and washing machines should last for several years and if they break, the retailer must replace them.
My guess is that all the money that I have saved on never taking an extended warranty will more than cover any major breakdown of a consumer item in the future.
The lesson here is that insurance companies are fairly savvy and they are going to avoid – through event exclusion and other means – having to pay out.
So crunch time is coming. As global heating takes its toll on property through fires, floods and rising ocean levels, insurance companies will do three things: raise premiums to almost prohibitive levels to cover the risk; refuse to offer or renew insurance; or refuse to pay out insured on whatever technical grounds they can muster.
The phrase, “It’s OK we are insured’, that for decades has made Australians comfortable in the face of constant risk (fire, flood, theft, storm or flood cover people), will become meaningless.
And without insurance, banks will not allow mortgages to continue. They will call the debt in.
But give the insurance industry its due. It works on science and actuarial mathematics – unlike the present Government which denies science and acts on Panglossian delusion. As global heating makes insurance untenable, we will hear the cry: “Why didn’t the Government act to prevent this?
And when foreign governments impose carbon tariffs against our exporters, industry will scream, “Why didn’t the Government act to prevent it?”
The answer, of course, is that voters were too apathetic to demand action or too gullible to understand that it was necessary, and to use the ballot box to demand action..
What has always been needed in the face of the huge uninsurable risk of global heating was not to insure against the damage but to take action to prevent the damage happening in the first place.
Alas, the preventative action is not happening. Prevention is not only better than cure. With climate change it is the only cure. There is no Plan-et B.
This article first appeared in The Canberra Times and other Australian media on 19 June 2021.