Global reinsurance giant Swiss Re said Australia's natural disaster risk was increasing and urged its governments to cover the rising damages bill using insurance instruments like catastrophe bonds as opposed to one-off disaster levies.
Mounting exposure in Australia to catastrophes...we feel requires a pre-emptive approach to financing disaster relief, particularly with government assets, Mark Senkevics, head of Swiss Re in Australia and New Zealand, said on Thursday.
We would like to see some form of insurance from government rather than a levy after the event, Senkevics said on Thursday.
The Australian government introduced legislation into parliament to create a flood levy to cover a $10 billion damages bill from recent record flooding in eastern states and a massive cyclone.
But the government is struggling to gain support for the levy, with one influential senator demanding state governments take out disaster insurance.
Catastrophe bonds, known as cat bonds, transfer the risk of natural disasters to investors, who receive a yield in return for agreeing to cover damages they consider unlikely, and lock in funds for disaster relief before storms strike.
Cat bonds are...just a means to take what is a fairly high risk...away from the government to an insurer and reinsurer or capital market investor, Senkevics told local radio.
GLOBAL DISASTER BILL RISING
Worldwide, insurers suffered at least $36 billion in catastrophe losses in 2010, according to Swiss Re -- the fourth-highest total of the last decade, and the highest if years with major U.S. hurricane landfalls are excluded.
Catastrophe bond issuance passed the $5 billion mark at the end of 2010, making last year the third strongest to date in the 20-year history of the cat bond market.
Senkevics said developed nations like Australia have historically not been big users of cat bonds as their budgets can cover disaster relief. Swiss Re issued its first Australian cat bond in 2006.
But as natural disasters become more costly, cat bonds may become an option for rich nations.
In the 1980s, the economic cost of global natural disasters totaled about $25 billion, in the 1990s costs rose to $95 billion a year, and in the last decade economic damage has reached an annual average of $130 billion, said Swiss Re, the world's second-biggest reinsurer.
This was mainly due to economic development, population growth and a higher concentration of assets in exposed areas, as well as climate change.
Yet the gap between economic losses and insured losses remains large. In 2005, Hurricane Katrina, which slammed into New Orleans, cost $140 billion in damages, but only $65 billion of losses were insured, said Swiss Re.
Munich RE, the world's biggest reinsurer, is reconsidering its pricing model for Australia due to natural disasters and is not ruling out higher reinsurance premiums.
The frequency of catastrophic events in the Australasian region has more than tripled over the past 30 years, with the loss potential also being on the rise, a spokesman said.