Insuring against disaster

Insurance is a well-established and well-proven model of risk management. We pay in advance for protection against the costs of disaster and share the cost burden across a larger community of like-minded contributors.

While imperfect (why should people who look after their health pay for those who don’t?), private insurance is still one of the best models we have when it comes to a non-government system of self-help.

But it is also expensive. I abandoned my own income protection insurance when it became prohibitively expensive for someone primarily engaged in unpaid community service. I did the same with my professional indemnity insurance for the same reasons although also offset the risks through far more disciplined contracting with clients.

But surrendering these two excellent forms of insurance leaves me exposed to real risks that, if a calamity does occur, could well see me in deep financial trouble. Even if I’m entirely in the right on a professional indemnity suit, for instance, I may not have the means to even defend myself against any claims. That’s the job of insurance companies.

There is a role here for government because I certainly trust a government insurance scheme like Medibank far more than I do those run by private insurance companies. Its impending sale therefore opens additional risks for me as a client, risks I don’t feel particularly comfortable with given the many others I also shoulder at the same time.

That aside, I get two benefits when I insure. One is a greater level of financial security. The other is an advocate who will be in my corner if or when trouble strikes. The latter is less recognised than the former.

While I might need another advocate (in the form of a regulator) to fight my own advocate (the insurance company) from time to time, at least I have someone on my side to start with. And that gives me a great deal of comfort.

This brings me to a confused policy debate at present in the sale of Medibank about whether the government can play the two roles together—that of regulator and provider. But this is a false dichotomy.  The two are in tension rather than conflict.

It is the same in business where there can be considerable strains between the CFO who wants to contain costs and a business unit that needs to expand investments to remain competitive. While the balance in the tensions between the two sides may go out of whack from time to time, they are both at least working for the overall benefit of the business—profitable growth over time—and the end result is usually a better business case leading to better investments producing better business results.

Things go out of balance when the accountants are ascendant, as they are at present, rightly or otherwise in the great ideological policy swings involved in changing government. They, the accountants, focus on costs to the exclusion of investments, making budget cuts to highly successful organisations like the CSIRO instead of seeking ways to add value to and extract higher value from them.

The dominant political rhetoric of regulator v. provider is little more than a purist’s view of a limited set of circumstances. One would be laughed out of court if one argued that the government cannot both regulate and run the military, our ultimate insurance policy against external man-made threats and as a first response in case of overwhelming natural disasters. The government does both and with good reason: the military is essential to a nation’s core disaster management capacities. Why not other forms of insurance too?

This is the fifth article in a series entitled The Disaster Blogs.