Dams. Gillard's three-card trick

She gets the money from where?

It’s as audacious as a raid could be. In order to find $100 million to extend dam walls in Sydney and Brisbane the Gillard government is raiding the equivalent of its coffee jar.

Even better, it’s taking out more than it needs - $150 million, directing the extra $50 million to cutting its deficit. Who could possibly complain?

“A whole lot of suits in Switzerland” is how one government source puts it. After the September 11 US terrorist attacks in 2001 the Howard rammed through the Terrorism Insurance Act. Australian insurers were refusing to insure big city buildings against the same sort of attack here. The Act forced them to offer the insurance and forced them to contribute to a newly established Australian Reinsurance Pool Corporation which would meet the claims.

Backed by an Australian government guarantee of $10 billion, the Corporation has been also been spending buying international insurance, spending for $75 million per year.

No more. Its $75 million per year contributions will stop for at least two years. Instead they’ll be paid to government as extra dividends (on top of a special dividend announced in the last budget). It’ll bank $25 million per year and spend $50 per year on worthwhile projects such as extending dam walls.

The Insurance Council of Australia won’t complain. It welcomes the spending because it’ll make it easier to insure homes at risk of flooding.

“It will certainly reduce the upward pressure on premiums, but we also expect them to go down in areas where there has been a major flood risk,” said chief executive Rob Whelan Thursday.

Looked at another way it’s a heist from the the CBD (which houses the buildings at risk of terrorist attack) to the suburbs at risk from the Warragamba Dam. It’s sneaky, its popular, and it’ll save money.

In today's Sydney Morning Herald 

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Unfortunate. The Australians who need insurance don't get it

Unless they're worried about dying

Insurance is hard to get if you are on a low income, unless you’re planning your funeral.

A report from the Brotherhood of St Laurence too be launched by assistant Treasurer Bill Shorten today finds most types of insurance particularly ill-suited to low income Australians, requiring big infrequent payments instead of small regular ones, imposing large excess payments, written in impenetrable language, and limited to minimum amounts that are beyond the maximum value of the possessions low income people have.

Except for funeral insurance. The payments are small and regular and it seems to be more popular the less income someone has.

Many of the 200 low income earners surveyed by the Brotherhood had funeral insurance but not home contents or car insurance, reasoning “they could eventually recover from a loss, and would prefer to ensure they were providing some security for family after their death”.

The biggest beef seems to be that with the exception of funeral insurance it is very hard to make small regular payments...

“Because the payments are big they have to compete with expenses on tangible goods such as food, or even a new TV,” said the report’s author Dominic Collins.

“All insurers should be required to accept payment through Centrelink’s Centrepay direct-debit facility which is already commonly used by essential services such as utilities.”

“And it should be collected with rent, for just a few dollars extra per fortnight, bulk purchased by housing providers.”

The study found 32 per cent of low income Australians did not insure their homes, rising to 79 per cent of very low income Australians. An “alarming” 26 per cent of very low income Australians reported owning a car but holding no vehicle insurance. Without third party property insurance they were at “severe risk” in the even of an accident.

Asked why funeral insurance appeared to be popular for people who couldn’t insure their car, Mr Collins put it down to advertising.

“Watch daytime television. It plays on the fear of being buried in a paupers grave and its advertised as being affordable. By contrast home contents ads are more of cabaret act - they are less effective.”

Published in today's Age


Reducing the Risks Insurance 2011



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Tuesday Column: Ignore the private health insurance guilt merchants:

These men want you to feel guilty.

Have you ever felt guilty about receiving a gift?

Thanks to the Budget, from July many of us are about to be suddenly free of the Medicare Levy Surcharge.

The gift will be worth $500 a year to someone earning $50,000; $700 a year to someone earning $70,000; and so on.

At the moment the levy is charged to anyone earning more than $50,000 and to most people in couples that have a combined income of $100,000.

You can escape from it by buying private health insurance but the effect on your bank balance is the same or worse – anywhere from $10 to $25 a week.

From July thanks to the Budget the surcharge will only apply to the small number of Australians who earn more than $100,000 a year or a combined $150,000 as a couple.

Most of us will get let off.

The Opposition wants us to feel guilty...

Its Treasury spokesman Malcolm Turnbull asks what the relief will cost “an already overstrained hospital system”.

Its health spokesman Joe Hockey predicts “a catastrophe for our already overrun public hospitals’’.

And its leader Brendan Nelson puts a (totally erroneous) figure on the damage saying it will remove “a net $300 million from Australia’s hospitals”.

How would this long-overdue adjustment of the Surcharge threshold do any damage at all to Australian hospitals?

The argument is that as people who at present feel compelled by the surcharge to join private funds drop out they will pour into public instead of private hospitals.

But if you think the effect is straightforward, or even significant, you’ve been spending too much time listening to Malcolm, Joe and Brendan.

The figure the Opposition Leader used in his Budget In Reply speech - “a net $300 million from Australia’s hospitals” – doesn’t refer to money that will no longer go into hospitals at all. It refers to money that will no longer go into the hands of people who take out private health insurance, because fewer are expected to take up private health insurance after the surcharge threshold is lifted.

What happens to hospitals is a different thing altogether. A point that the Secretary to the Treasury Ken Henry was keen to make in an unusually personal way at his post-Budget address last week.

Many, many people who take out private health insurance rather than pay the surcharge do so only for that reason.

The funds help them to do it.

Try this yourself. Go to the Medicare Private website and get yourself a quote. You will be asked what you main priority is. Among the options is number 6: “Reduce Tax”.

There you will find a policy that will help you do that, but not much else.

The one offered by NIB Health Insurance fully funds only the removal of teeth, minor knee, hip & shoulder investigations, the removal of tonsils and appendixes, minor hernia surgery and the use of an ambulance.

Anything else is covered only to the extent of a shared room in a public hospital, which as the NIB says “won't go anywhere near the cost of a stay in a private room in public hospital”.

And a lot more is explicitly excluded including major joint surgery, pregnancy and renal dialysis.

It is a good policy unless you plan to get ill.

The NIB product and ones like it are designed to help people escape the surcharge rather than provide them with cover. They are the fastest-growing category of “health insurance” products, and most are never used.

Ken Henry himself had one.

“I myself had one of those insurance policies that voided the Medicare levy surcharge, I don’t remember using it, some pretty cogent reasons for that,” he said last week.

One of those reasons might be that if he did try to use it in an emergency at a public hospital he would run the risk of being charged for extras, something that doesn’t happen to uninsured patients.

The golden rule among people buying tax-dodge policies is to put them in a draw and never use them. Enter public hospitals as a public patient and accept the (usually very high) standard of care you are offered.

These are the policies that hundreds of thousands of grateful Australians are likely to drop first (or no longer take out) when the Medicare Levy Surcharge is lifted.

They are no loss. As financial engineering rather than health insurance products they take not an iota of strain off “an already overstrained hospital system”.

Of course some Australians affected by the surcharge do take out genuine private health insurance. For them, lifting the surcharge threshold will make little difference. They don’t pay it anyway. They will continue to buy private health insurance if they believe it continues to offer value them for money. And they will continue to get the separate tax rebate paid to them for doing so.

There’s a third group affected by the surcharge, and at last week’s function Ken Henry gave a hint that he might be among them. He used the past tense when he said he “had one of those insurance policies that voided the Medicare levy surcharge”. He might not have one now.

I don’t have one. The latest available tax figures suggest that another 14,019 Canberra residents liable for the surcharge don’t either.

Nationwide, almost half a million Australians prefer to pay the Medicare Levy Surcharge rather than join a fund. Even though they know they could save money by doing so.

Why do so many people do something so apparently irrational?

In my case it is an abhorrence of financial engineering. If the government wants money from me I would rather pay it than be pushed into what is effectively a tax-avoidance scheme.

From July most of us will be freed from that dilemma. We will no longer be prodded into buying fake private health insurance and we will be able choose to buy the real thing (or not) based on its merits.

Those merits are not obvious - at least not in my case, and perhaps not in Ken Henry’s. In an emergency there is no better place to be than in a public hospital.

You can get elective surgery there as well, and if the wait is too long you can buy it in a private hospital.

We shouldn’t be made to feel guilty for spending our money wisely.

Hospitals need public support. Private health “insurance” does not.

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Inquiring all summer

On Life Matters 9 December I talked about the extraordinary number of important government inquiries taking place over summer and asked - why it is that John Howard (belatedly) seems in so much of a hurry.

By far the most important is the Prime Minister's Home Ownership Taskforce.

Set up at the end of November, with submissions due by the end of December and with a final report due by March the deadlines are tight.

But the work won't be as hard as it might have been. Virtually everyone on the Task Force and its subcommittees has already indicated that they support the idea that'll be investigated. (See John Quiggin for a note that suggests that this may have been a criteria for an invitation to work for the Taskforce.)

Malcolm Turnbull's Menzies Research Centre will run the Task Force. It is the group which has been pushing the proposal. As was once said about Allan Bond the Prime Minister appears to want his advisors to tell him how to do what he wants not whether he should.

Which worries me little. The idea of allowing individuals to buy houses through a limited partnership with financial institutions has much going for it...

Right now, many individuals are condemned to all of the indignities and uncertainties that go with renting because they can't afford to buy a house.

Almost as bad, most of those that can have put everything they own and more into "one property in one suburb of one city. No one who is engaged in any sort of responsible financial advice would ever advise someone to do such a thing, and yet most Australians do."

Super funds and financial institutions by contrast are crying out for an asset such as housing. In aggregate residential real estate is safe - a much-needed hedge against stocks and bonds.

The MRC wants stamp duty and other rules changed to allow financial institutions and individuals to buy houses in (say 50-50) partnership. The individual ("managing partner") would have the right to live in the house and make alterations etc to it for as long as they wished.

They would have an incentive to maintain the house well, because when they did decide to sell they would get to keep a certain proportion of the proceeds (say 50 per cent, or maybe 45 per cent).

Although the institution has no say in when the house is sold, in aggregate the resale rate will be predictable and will provide regular income, without the fund needing to lift a finger to manager the property.

Australia has led the way in financially innovative solutions before. We invented HECS, we invented the Child Support Agency ideas now copied elsewhere. This idea has the same sort of potential.

At least that's what the Prime Minister thinks. On Life Matters I said he is acting like a man who has little time, and wants to achieve something worthwhile before he goes. Curiously Ross Gittins arrived at the same conclusion (about little time) at about the same time.

Also inquirning over summer is the Dawson review of the Trade Practices Act which was due to report at the end of November but has had its deadline extended until the end of January. Allan Fels looks set to get much of what he wants.

And the HIH Royal Commission which has to report by the end of February. Its terms of reference do not include and have been interpreted not to include the political donations made by HIH and FAI. A pity. Because they may be part of the explanation for what happened.

And there's the hard-to-come-to-grips-with Prime Minister's review of the corporate governance of Commonwealth statutory authorities. John Uhrig ex of Westpac and CRA has been given until June to report on the management of organisations including the Australian Taxation Office, Australian Competition and Consumer Commission, Australian Prudential Regulation Authority, Reserve Bank of Australia, Australian Securities and Investments Commission, Health Insurance Commission and Centrelink.

What's it all about? The PM promised it during the election. He gives the impression it is about bringing the organisations which bug business under tighter control of Government Ministers. Which is probably exactly the wrong thing to do. As the Palmer Report into the collapse of HIH makes clear. If the relevant Minister (the then Treasurer John Howard) hadn't intervened to issue an insurance licence to FAI over the head of the Insurance and Superannuation Commission in late 1970's the HIH collapse may not have happened. The right answer is probably less Ministerial control over Allan Fels, Graeme Samuel and the lot of them. It must be said though that there was a failure of corporate governance at APRA. It was under funded and as the Palmer Report makes clear, its board members had a hands-off approach to their job.

I discuss here what appears to be a general laxity in these organisations when it comes to investigating complaints.

My fear is that the people to whom the Prime Minister promised the inquiry want more laxity not less.

Update/ Correction

A closer reading of Ross Gittins talk shows that he didn't suggest Howard was to resign in the year ahead. He canvassed the possibility in great detail before concluding that Howard wouldn't do it.

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The limits to economics.

On Life Matters with Geraldine Doogue last week I discussed what the Bali tragedy and others like it tell us about the limits to economics and pricing.

After September 11 last year Allianz Insurance specifically excluded from its travel insurance policies cover for consequences of acts of terrorism.

Yet as soon as an act of terrorism took place that exactly fitted the criteria for exclusion, Allianz waived the exclusion.

Many Australian travelers to Bali chose not to take out travel insurance, knowing that their cost of travel back home would not be covered if something went wrong.

And yet within hours of the Bali tragedy the Australian government said it would help out anyone who wasn't insured.

Which might make you wonder whether there is any point in treating the wording on insurance policies seriously...

I am told (perhaps unreliably) that the first-class tickets for passengers on the Titanic entitled them to guaranteed access to lifeboats. Not so for the third-class tickets.

And yet when tragedy struck the clearly-defined rules fell apart.

Tragedy shows up the limits to economics and pricing.

As do religious matters. In 1990 Clive Hamilton headed research at the Resource Assessment Commission. He attempted to put a financial value on the worth of preserving Coronation Hill at Kakadu. He used to ascertain how much money Australians would be prepared to pay to have Coronation Hill not mined. He told me later that he lost his faith in such surveys when he asked himself how it would sound if he asked the same questions to an aboriginal people with spiritual ties to the land. Even to ask the questions would be offensive, and would degrade the religious attachment it was attempting to measure.

That's the concept I dealt with on Life Matters, quoting from a paper entitled Taboo Tradeoffs: Reactions to Transactions that Transgress the Spheres of Justice.

The Abstract says:

"Taboo trade-offs violate deeply held normative intuitions about the integrity, even sanctity, of certain relationships and the moral-political values underlying those relationships. For instance, if asked to estimate the monetary worth of one's children, of one's loyalty to one's country, or of acts of friendship, people find the questions more than merely confusing or cognitively intractable: they find such questions themselves morally offensive."

God, life and death, and love appear to be among the entities that pricing is not only bad at handling, but to which it can do enormous damage.

The authors Fiske and Tetlock attempt to explain why this is, and suggest ways how, in the absence of prices, we can rationally make the tradeoffs that we have to between say, mining and god, or prices and life.

I agree with them that prices are useless and actually cause damage in many circumstances, I think their explanations of why this should be the case are reasonable, but I find their suggested solution unsatisfying. Having said that, I can't think of a solution at all. How can you trade off apples and oranges if you can't use prices?

Worth a read.

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