Stop bailing out the irresponsible
The Australian, 1 March 2009
Someone had to say it. The Insurance Council of Australia has bravely come forward to make the obvious and rational point amidst the emotional brew of the Victorian bushfires. The ICA is advocating mandatory home and contents insurance for those who live in bush-fire prone areas. The critics will say a bunch of insurers would say that, wouldn’t they? They are looking for more business, right?
Of course, they are. But that does not detract from the logic of their central point. Indeed, more of us need to point out the illogical outcomes that flow when we encourage people not to insure their homes. “Why would you pay insurance premiums for 15 years when you know the bloke next door (without insurance) is going to get his home rebuilt to the same standard or higher?” ICA spokesman Paul Giles said. “We have compulsory third-party personal insurance for motor vehicles and you have to wonder why we are not having this discussion.”
It is tempting to dole out taxpayer dollars payouts to those hit by brutal fires. Images of people who have lost their homes are powerful. Yet, it makes no sense to encourage people to look to government for help when things go wrong rather than take responsibility by insuring their homes.
The ICA says that 24.5 per cent of Victorians do not have home and contents insurance – up to 30 per cent in the areas affected by bushfires. That figure will only rise if people work out there is no point insuring if government will step in and save them. It may be an irresponsible decision not to insure but it is an entirely rational decisions if you know you don’t need to insure. And the money to bail out those people has to come from somewhere. Each of us will end up paying for the irresponsible decisions made by others.
The situation is made worse by the unintended consequences of the Fire Services Levy. The levy in NSW and Victoria is imposed on policy-holders and effectively doubles the cost of home insurance. As The Sun-Herald pointed out, the levy accounts for 75 per cent of the total budget for the NSW Fire Brigade and 77 per cent of the Melbourne Metropolitan Fire Brigade and the Victorian County Fire Authority. So we are talking about serious sums of money being funnelled into the fire brigades by those who insure.
The perverse incentives arising from the imposition of this levy are clear enough. By making insurance more expensive, the levy encourages fewer people to take out insurance. The end result is those who act responsibly by insuring – and funding the fire brigades - end up paying for those who behave irresponsibly. Instead of slugging those people who do the right thing, a better solution is to expect each of us to pay for basic services such as fire brigades. Instead of a levy, government should be dipping into consolidated revenue.
The Sun-Herald reported NSW Emergency Services Minister Steve Whan as saying that “it seems heartless and a little too early to be quibbling over money while the fires are still burning and the final extent of this tragedy is still not known. People all over the country have donated generously to the bushfire victims without thinking about whether they were insured.”
Whan is wrong to mistake heartfelt charity for ill-conceived government policy. It is only right that people have donated in droves. But it is wrong for government policy to encourage people to take the path of irresponsibility knowing that others will bail them out. That is not heartless. That is common sense, a commodity often in scarce supply when you entrust governments to spend your money wisely and fairly.