Insurance

The Australian Financial Review reported that NIB’s CEO has said that the insurer needs an increase of around that mark because “ultimately, we have to cover claims inflation like any insurer because if you don’t eventually you go out of business.”

While this might seem obvious, it ignores the reality that the main reason private health insurers might go out of business is because people hate the product they offer, and even with all the carrots and sticks designed to force people to take out health insurance, a majority of Australians do not want it.

Over six years ago I pondered if private health insurance was a con. In the time since, during which we have experienced the greatest health crisis in a century, nothing has really changed the answer.

Not only does it remain untrue that private health insurance takes stress off the public system, it also remains a fib to call it private – it’s a public system merely carried out in an inefficient manner to deliver a product most people don’t want and haven’t ever wanted.

In the late 1990s, after 15 or so years of Medicare, fewer than a third of Australians held private health insurance. Then John Howard decided that the private sector needed help from the public sector.

He introduced a surcharge to penalise higher income earners who did not have private health insurance.

The stick was not enough. Howard then tried the carrot: providing a rebate on your private health insurance. These rebates are quite pricey – the government this year will spend about $7.5bn on them.

It did bugger all – you literally could not pay people to buy it.

Recent coverage of insurance markets has highlighted the industry’s involvement in the so-called “climate risk doom loop”: looming climate risks and worse disasters are raising the price of insurance for real estate and infrastructure assets, exacerbating their owners’ vulnerability to future disasters and feeding into higher insurance prices in the future―or the withdrawal of insurance coverage altogether.

Rising insurance prices and the credible threat of insurer divestment from higher-risk areas will constrain investment in both homes and businesses across vulnerable communities. Yet more people are moving into higher-risk areas, and some politicians fear backlash if they let insurance companies deny these communities coverage. In response, state leaders in California and Florida have sought to prevent divestment by directing their insurance commissioners to adjust pricing regulations, invite competition in insurance markets, or derisk insurers by imposing disaster-risk fees on all insurance purchasers regardless of risk.

Private investors, meanwhile, believe the insurance industry should follow price signals: if firms can identify the climate risks an assets could face, and investors price those risks into building and maintaining costs, then market actors will invest prudently.

I argue that insurance is a woefully inadequate financial tool for coping with the impacts of climate change. Improving insurance markets does little to address the fact that the core drivers of the “climate risk doom loop” rest in the design of capital markets, which are structured to direct investment away from vulnerable communities when they most need it.