is it worthwhile for young male folks to pay more for car insurance than the older female, or make young, energetic and healthy people to purchase private insurance just to keep the cost of health insurance low for the older customers to afford?

As climate risks and catastrophic weather events become more frequent and severe, the government is considering a plan that will see north Queensland homeowners receive subsidies.

Really, is it worthwhile for young male folks to pay more for car insurance than the older female, or make young, energetic and healthy people to purchase private insurance just to keep the cost of health insurance low for the older customers to afford?

And how about the fact that people living in the far north Queensland pay much more for home and contents insurance than those residing in the southern states?

While there’s no straight answer to these questions, there’s one wrong person you can ask—an economist.

Why?

This is because economists don’t know how to be “fair”. We learnt no such thing in our degrees but learnt that the democratic forces—not market forces—should be factored in order to answer questions with fairness.

Though economists say little about fairness, we have one simple thing to say about risks—someone must pay for them.

We are so focused on the costly harm that car crashes can do to people that we compel them to purchase third-party insurance policies when registering for their cars. However, when it comes to the car’s insurance, if you’re one of those people who crashes cars more often or your car is the type that crashes easily, you will have to cough more to insure your car. Is that really fair? Once again, don’t ask me, because I’m only an economist.

Democratic believes about fairness also play huge roles in private health insurance. While a car accident is unpredictable, people have a fair idea when they suddenly require a hip replacement, obstetric glasses or care. Consequently, people who know they might require costly health treatment (particularly the young single blokes) care less.

In Australia, we’ve created a range of sticks and carrots where we compel many young people to buy private health insurance even when they don’t think it’s necessary. This means young people pump more in private health insurance than they wish, and this ensures that the price of insurance for the older folks remains down. Sounds fair?

So, what of the home and contents insurance in parts of northern Australia? As the planet continues to heat up, the risk to property due to the effects of cyclones and hurricanes continues to soar. Similarly, as sea levels rise alongside our coal exports, the risks of coastal erosion and storm surges damaging beachfront properties can only increase.

Homeowners in high risk areas

Hence, should homeowners in high risk areas be forced to pay higher insurance premiums as climate risks and global emissions continue to increase? Should first-time or young renters subsidise the cost of home insurance for those fortunate homeowners in north Queensland? Sadly, the Australian Competition and Consumer Commission only gives a defiant maybe.

A recently published report by the ACCC as requested by Scott Morrison when he was treasurer reveals that just the same way it’s costly for young men to insure their sports cars than it’s for older women to insure their new sedan, it’s a lot more costly for people to insure a property in the cyclone-prone north Queensland than in Sydney’s more secure western suburbs.

However, unlike the young and energetic sports car drivers, homeowners in the northern Queensland boast influential political representatives and as such, the Morrison government is seriously considering the idea of providing subsidies to homeowners in north Queensland. While the ACCC carefully recommended that “if governments want to provide immediate relief to consumers facing acute affordability pressures, subsidies [should] be used in preference to other measures”, most headline writers intentionally dropped the “if” and reported that, “ACCC recommends government subsidise insurance in top end”. Job done.

Assuming that the north Queensland MPs who often oppose policies for climate change succeed in wooing their southern counterparts in subsidising the costs of climate change up in the north, who will be left to pick up the tab? Would spending less on other services finance it, or should they introduce a new levy?

While user pays is generally considered fair for eggs, bacon and other consumer products, things like education and vaccination which carry a public benefit associated with private consumption, most members of the public as well as economists, agree that subsidies are very OK. And while majority of people don’t mind if soaring insurance prices would discourage young and carefree men from purchasing fast cars, most folks do mind if increased costs can end up discouraging parents from sending their children to school or from being vaccinated.

This takes me back to the risky venture of owning a home by the ocean up in the tropics of northern Queensland. One time Queensland Mp Peter Dutton laughed at the effects of storms and rising sea level on Pacific Island countries, but when the same happens to his own state, it simply becomes a no-laughing matter.

As an economist, I have no authority to determine the fairest way to deal with the increasing risks of climate change within northern Queensland including:

Homeowners pay:

Allow insurers to do their job and carefully assess the risk of every property. If insuring some properties is considered “too expensive” then the prices of those properties will certainly drop as potential buyers factor in the costly insurance premiums to what is seemingly a “cheap house”.

Taxpayers pay:

The general public should pay for the risks in north Queensland. Even though the costs will be minimal when spread over to 25 million Australians, no price signal will be significant enough to discourage people from developing even more expensive homes in the increasingly cyclone-prone regions.

Disaster levy:

If we don’t want the general public or homeowners to pay, then a levy should be charged to companies that gain from contributing to climate change. This kind of a levy will go a long way in helping not just homeowners but also local councils and other groups that shoulder the cost of other people’s decisions to sell or buy coal.

Let me remind you once again that economists don’t do “fair” but prefer user pays in order to change consumer behaviour, and levies to change manufacturer’s behaviour. But I somehow concur that when it comes to the costs of climate change in northern Queensland, coal enthusiasts in the National party should simply ask the “inner city elites” to pay. But the hard question beckons, for how long will the Liberals from the southern states sit back and watch them get away with it?

The information contained in this article is of a general nature only. It does not take your specific needs, objectives or circumstances into consideration, and is not financial advice, legal advice or otherwise a recommendation to purchase any financial product or insurance policy. You should seek your own independent financial advice from a qualified financial and insurance adviser before making any financial decisions, and seek your own independent legal advice from a qualified solicitor before making any decisions of a legal nature.

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