Dale Boccabella

There are changes to taxation law, which are being introduced as part of the Mid-Year Economic and Fiscal Outlook. Company tax, the baby bonus and private health insurance are being targeted by the federal government.

The budget has lost $3.9 billion in tax receipts for this financial year since the May budget and $21 billion over four years. In particular declining commodity prices have led to a crash in forecast receipts from the mining tax from $13.4 billion over four years to $9.1 billion. As a result, the government has increased some taxation.

Corporations will have to pay company tax monthly, rather than quarterly. While this will ensure that instalments are closely aligned to fluctuations in these businesses’ income, it isn’t exactly going to be helpful to firms which are already struggling under a bureaucratic workload.

On the cuts to the baby bonus from $5000 to $3000 for the second and each subsequent child, this is a relatively minor item for the government – however it will impact on parents. Expensive items such as the cot, pram, change table and baby capsule can sometimes be reused for subsequent children, but they are often hit by other costs.

There are changes to private health insurance starting in April 2014. This will increase the cost of all premiums. Under the latest round of cuts, the government’s 30 per cent rebate will no longer automatically be increased to match the annual increase in premiums. Instead the rebate will be indexed to inflation, which is normally less than the premium increases. There’s a double whammy too – if the premium increase is less than inflation, the rebate will be indexed to that.

We already saw increases in the May budget. At the time, the government means-tested the private health insurance rebate, which will save it about $2.8 billion over four years. This further measure will save $700 million over three years. For those people who thought they had escaped by being under the private health insurance means testing limit, they will now be hit by having the rebate indexed to inflation. However I expect this measure may put a bit of pressure on the funds to try and cap their premium increases.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business.

From the Knowledge@Wharton today blog.

What is the role that risk-based premiums and means-tested insurance vouchers can play in the future?

For Howard Kunreuther, Erwann Michel-Kerjan and Wharton’s Risk Management and Decision Processes Center,  examined these issues in their book, At War with the Weather, published in 2009.

The first principle, outlined in At War with the Weather, addresses risk-based rates and states that: “Insurance premiums should reflect risk to signal to individuals how healthy and safe they are, what preventive or protective measures they can undertake to reduce their vulnerability to illness and/or property losses, and whether buying insurance really reflects efficient risk spreading. Risk-based premiums should therefore also reflect the cost of capital that insurers need to integrate into their pricing to assure adequate return to their investors.”

 The second principle – on equity and affordability issues – states that: “Any special treatment given to consumers at risk (e.g., low-income uninsured or inadequately insured individuals) currently residing in hazard-prone areas should come from general public funding and not through insurance premium subsidies.”  

Last month, the US Congress renewed the National Flood Insurance Program (NFIP) for another five years and authorized a study on the role that means-tested insurance vouchers can play in the future. “This is such an important piece of legislation from our vantage point,” says Kunreuther, Wharton professor of operations and information management, and co-director of the Center. “It is the first time that Congress has really indicated that a program such as the NFIP should consider risk-based rates as a basis for selling insurance while recognizing that one needs to address the concerns of low-income people by considering the possibility of means-tested vouchers.”

The recommendations coming out of Congress “are ideas that Erwann [managing director of the Center] and I have been talking about with Congressional staff, FEMA (Federal Emergency Management Agency) and others for the past several years,” he adds.

A report titled Disaster Resiliency: A National Imperative was released today by the National Research Council (NRC), an arm of the National Academies of Science. Among their recommendations, the NRC study calls for investment in risk reduction through insurance and other financial instruments that enhance resilience by encouraging mitigation of properties and infrastructure. More specifically, the report indicates that one way to achieve resilience is to tie multi-year insurance policies to the property with premiums reflecting risk. Risk-based pricing can serve as an incentive that communicates to those in hazard-prone areas the level of risk that they face. Use of risk-based pricing could also reward mitigation through premium reductions and should apply to both privately and publicly funded insurance programs.

The report, says Kunreuther, a member of the committee which met for 18 months, included specific mention of insurance vouchers, one of the approaches that the Wharton Risk Center has long advocated.

Kunreuther and his team at the Center elaborate on the issue of vouchers: Low-income families in hazard-prone areas would pay a risk-based insurance premium and then be issued an insurance voucher to cover a portion of the increased cost of insurance. The amount of the voucher would be determined by the family’s income and the magnitude of the increase in the insurance premium. Several existing programs could serve as models for developing such a voucher system: The Food Stamp Program, the Low Income Home Energy Assistance Program and the Universal Service Fund.

Whether the legislation passed in July will make a significant difference in the treatment of natural disasters “is an interesting question,” says Kunreuther. “It’s clearly important to sustain the momentum coming out of the NRC study, and we are doing that, along with other centers and universities. These issues also have an impact on climate change when you think about sea level and flood risk threats, which is another area our Center is working on.”

Kunreuther notes that a book to be published this fall co-authored with Wharton health care management professor Mark Pauly — Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood Industry — advocates the same general principles as At War with the Weather, but “is a much more general book on insurance,” dealing with insurance issues related to property and health care.

Noting his delight over the passage of the NFIP renewal, Kunreuther also says that “the champagne will come out only when people start doing the next steps, such as making everyone aware of the fact that better flood maps are needed in order to highlight risk. It will also be crucial to figure out ways to deal with the affordability and equity issues, which is why the insurance vouchers have such an important role to play going forward.” But overall, he adds, Congress’s action last month “was definitely a cause for celebration.”

This blog was previously posted in Knowledge@Wharton today blog: Dealing with Natural Disasters, and Beyond

Michael Sherris

There is a large cost to insurance companies of Tropical Storm Irene which has hit America’s north west, and the much larger Tropical Storm Nanmadol which is pounding the coast of China right now.

These two vast tropical storms have shown how unpredictable and potentially damaging these weather events can be. Insurance companies – and those that re-insure them – are now counting the cost. Alas, it seems we’ll all have to pay the price, even those a long way from the storm.

Tropical Storm Irene has killed 38 people, and insurance claims could top seven billion dollars, according to the Consumer Federation of America.

It’s not long since we experienced the massive flooding from Cyclone Yasi in Queensland and we saw the massive damage these events can cause. Even though Irene became a severe tropical storm rather than a hurricane, the costs will be substantial because of the populated area that it affected. The insurance industry will pick up a significant amount of the cost, however considerable losses will be incurred by individuals who will not be covered by insurance.

Claims for wind damage are expected to be one sixth of the total sum from Hurricane Katrina in 2005, and claims for flood damage one tenth, the Consumer Federation of America estimated.

As populations increasingly move into areas such as the East Coast, including Florida in the US, the potential exposure to loses from natural catastrophe events increases, even if the risk of these events happening may not be increasing. Nevertheless, theories on climate change do suggest that these events could be increasing in severity and frequency so this only adds to the risk.

Meanwhile overnight torrential rains and fierce winds have hit south-east Taiwan causing extensive disruption, as Tropical Storm Nanmadol swept over the island, and now heads for China.

There are many disasters that can hit dense areas of population. If we just look over the Tasman, even earthquake risk can be seen to be something that can cause massive economic losses. The Christchurch earthquake highlighted this. Insurance companies have taken significant losses and a number of insurers are struggling financially as a result.

The insurance industry is already reeling after 2010 was the second worst year for natural disasters since 1980. There were 950 incidents with insured losses amounting to about 37 billion dollars. Natural catastrophes in Australia and Oceania made up about 16 percent of global losses last year, the costliest being September’s Christchurch earthquake.

I feel it is vital to remember that disasters like this may hit home in Australia. This still remains an issue deserving attention. Australia is not immune from natural catastrophes yet individuals still have significant exposures to these losses that in many cases are not insured.

After the Queensland floods, premiums rose for all Australians, even in non-flood prone areas, because insurers pool risks by averaging losses across all policyholders. As supply falls and demand increases, premiums increase. In this case demand is increasing due to the catastrophic events, and supply is falling due to capital constraints on insurers.

Tropical Storm Irene may seem a long way off – but remember, insurers work in a global market.

Michael Sherris is a Professor of Actuarial Studies at the Australian School of Business.