In the wake of Alfred, how do we think about and measure the cost of catastrophes?
- Written by Roger Jones, Professorial Research Fellow, Victoria University
Ex-Tropical Cyclone Alfred is the latest in a succession of extreme rainfall events to wreak havoc on coastal communities in New South Wales and Queensland.
Over 500 kilometres[1] of coastline has been affected, with extreme rainfall and flooding reaching inland to Lockyer Valley[2] and the northern rivers[3] of NSW.
This is a massive area, affecting hundreds of thousands of households, with tens of thousands of people stranded. Similar numbers of properties are likely to be damaged.
It’s only been three years since the same general region was affected by major flooding. Many people are still recovering. So, how exactly do we think about and measure the cost of such catastrophes? What lessons have been learnt, and how well are they being practised?
Read more: More households than ever are under-insured. Here's what needs to be done[4]
The costs of catastrophes
It’s too early to make a comprehensive estimate of the costs of Alfred, as some impacts are continuing to unfold. But previous natural disasters offer us a framework for thinking about them.
The costs of natural disasters can be accounted for in different ways. Impact costs include social, financial, economic, environmental and cultural values.
These can be broken down further into direct, indirect and intangible costs. Intangible costs are things with value that do not contribute directly to the market economy.
An assessment[6] of the 2022 Queensland floods, produced by Deloitte Access Economics for the Queensland Reconstruction Authority, estimated the total cost of impacts to be A$7.7 billion.
Tangible economic costs were estimated at $3.1 billion, and intangibles at $4.5 billion. Intangible losses included mortalities, injuries and long-term changes in health and welfare caused by the event.
Some costs are hard to measure
Not so long ago, economic estimates were restricted to direct losses on property and infrastructure, and lost income for individuals and businesses, so we’ve come a long way.
Even though estimates are becoming more sophisticated, they generally cover social, financial and economic impacts. Environmental and cultural losses are often less of a focus, unless they are closely linked to income.
If you ask people why they love living in a particular place, they’ll often say its because a location is special to them. That might be because of the relationships they have with neighbours or community activities they take part in.
These things aren’t featured in measures of economic activity, but they are a feature of people’s lives.
This raises the issue of marginal costs. When we only look at the dollar cost of damage, we can lose sight of how disproportionately it can impact the more vulnerable groups in society.
This includes those who rent, those with limited incomes, the elderly, those with limited mobility or long-term medical conditions (mental and physical), recent immigrants and marginalised groups in society, including traditional owners.
Lasting damage from a natural disaster can include things like loss of identity, a place to live, treasured possessions, loss of a loved animal or family breakdown.
Insurance only goes so far
Another way to assess the cost of a catastrophe is through an insurance lens – losses that are recoverable through insurance and those that are not covered.
The Insurance Council of Australia has become much more proactive[7] in recent years, recognising that preparedness and prevention can minimise these losses.
But insuring against major catastrophes relies on reinsurance, policies purchased by insurance companies themselves to cover peak losses.
The federal government has also established its own Cyclone Reinsurance Pool[8] with the aim of pushing down premiums for consumers.
Well-targeted relief can bring benefits. One study[9] examining the response to the 2010–11 Queensland floods found the government’s post-disaster relief payments were effective in aiding economic recovery.
A new reality
The governance arrangements surrounding disasters in Australia – national plans for how to prepare, respond and recover – are rapidly evolving[11]. This has been largely driven by the disasters themselves.
Disasters in Australia have historically been bad, but infrequent. Now they are occurring on an almost annual basis.
Some locations are more exposed than others, including northeast NSW and southeast Queensland. The economic cost of the 2010-11 Queensland floods was estimated to be equivalent to 5.2%[12] of the state’s gross domestic product (GDP) in that year.
Losses will continue to mount as such events become more frequent and severe.
That means we need to look at the full economic picture of the catastrophe life cycle. For climate events, this means looking not only at what we spend on insurance, preparation, prevention and recovery, but also the money invested in fossil fuels and subsidies.
The Climate Council has projected that parts of Australia might become uninsurable by 2030[13]. A recent report by Climate Valuation looks at high-end flood risk down to suburb and address level[14].
Such projections are almost certainly underestimated because the models that are used do not adequately predict how fast extreme events are changing[15].
People need relief now, but we cannot continue to finance our own destruction over the longer term.
References
- ^ 500 kilometres (www.abc.net.au)
- ^ Lockyer Valley (www.abc.net.au)
- ^ northern rivers (www.abc.net.au)
- ^ More households than ever are under-insured. Here's what needs to be done (theconversation.com)
- ^ Jason O'Brien/AAP (photos.aap.com.au)
- ^ assessment (www.qra.qld.gov.au)
- ^ proactive (insurancecouncil.com.au)
- ^ Cyclone Reinsurance Pool (theconversation.com)
- ^ study (www.sciencedirect.com)
- ^ Jono Searle/AAP (photos.aap.com.au)
- ^ rapidly evolving (www.nema.gov.au)
- ^ 5.2% (www.sciencedirect.com)
- ^ uninsurable by 2030 (www.climatecouncil.org.au)
- ^ suburb and address level (climatevaluation.com)
- ^ fast extreme events are changing (www.nature.com)
Authors: Roger Jones, Professorial Research Fellow, Victoria University
