Why Australians Will Pay for Queensland’s Floods


Yesterday I wrote to you about the silly headline in The Age newspaper. It was this:

“Queensland rebuilding will boost GDP”

Look, we love it when we see this kind of nonsense written. Simply because it gives us an excuse to again read Frederic Bastiat’s, “That Which is Seen, and That Which is Not Seen”.

You can click here to read it for yourself.

I won’t reprint it because you should read the entire essay. But in a nutshell, it’s economic nonsense to suggest that a flood will be beneficial to an economy.

Only an economic ignoramus would argue such a thing. Floods destroy things. Floods make no distinction between the destruction of brand new goods and goods that are due for replacement.

The last time we brought up this subject we were told it is good for the economy because money comes into Australia from insurance companies. That this money hasn’t been taken from elsewhere in the economy.


To borrow from the title of Bastiat’s essay, it only considers that which is seen but not that which is not seen.

Even so KPMG chief executive Michael Andrew is quoted in The Age article:

“This will release a lot of cash from insurance company balance sheets, many of which aren’t in Australia. Many are reinsured offshore in Europe or the US, so the extent to which they have to fund loss-of-profit claims, a lot of money potentially flows into Australia.”

It’s the idea that Australia is getting a free lunch from the insurance companies.

The fact is, Mr. Andrew couldn’t be more wrong if he tried. But let’s run through the argument in more detail…

Think about it, how do insurance companies raise money? They charge premiums. Premiums paid for by Queenslanders and others.

Now, how does an insurance company pay for the claims made by policyholders? It covers the costs from its reserves but would also issue bonds to investors which it will then repay over time from insurance premiums.

Here’s the problem for the insurance company. Aside from the big payouts such as the Queensland floods, or the Christchurch earthquake, the insurance companies also need to pay out other everyday claims.

So, the insurance company will need to rebuild its cash reserves.

How will it do that?

Simple, it’ll need to increase insurance premiums.

And who pays for the insurance premiums? Individuals and businesses. In other words, money that would otherwise have been spent elsewhere or saved will be now spent on increased insurance costs.

Yes, some industries may benefit as claimants buy another item of furniture to replace the item that was destroyed. But it is at the expense of say, the clothing store where someone may have spent money but they are no longer able to do so because of the increased insurance premium.

But what about this idea that foreigners are actually funding the rebuilding as the cash flows in from overseas.

While that may be true, it ignores the attitude of those overseas investors. If a reinsurance company has to fork out more money than expected to pay for a major incident then it will naturally demand an increased return or premium before it invests more money.

That means the Australian insurance firm paying a higher rate on the bonds it issues or on the reinsurance policies. And that means passing on higher premiums to policyholders.

In economics there’s no such thing as a free lunch. If something is destroyed and needs replacing then there will be a cost to replace it. That cost will either be a direct or indirect cost.

Think about it this way. If there really wasn’t a cost, then why wouldn’t you just crash your car and write it off at every opportunity? I mean, that’s the logic Mr. Andrew is using.

The reason you don’t write your car off is because you know there will be a cost to you in the form of an increased insurance premium when you get your next car.

There is no difference between this example and the costs of the Queensland floods. To the Australian economy as a whole, and to anyone who holds any kind of insurance policy there will be a cost.

Claiming that foreigners will pay for the flood damage without any impact on Australians is just another childlike example of the Australian mainstream falsely believing that ‘Australia is different.’

One day they’ll get it through their thick skulls that Australia isn’t different. Australia has benefited from an extraordinary boom in the resources industry which has helped prop up the entire economy.

When that boom stops, the Australian economy will suffer. Only then will the mainstream numpties realize that the Australian economy is no different to anywhere else.

Kris Sayce


Money Morning

Monday: You’ve got your eye on a stock – but you’re not sure if it’s the right time to buy it… You’re holding another stock that just went up – or down – significantly… but you don’t know whether it’s time to sell… The solution to both of these dilemmas will become a lot clearer once you’ve watched this video (turn on your speakers).

Tuesday: No wonder Diggers & Drillers editor Dr. Alex Cowie looked jolly as he bounded into the office this morning. The “Stock Doc” has been long coal stocks since March last year. Click here for more…

Wednesday: We see the lazy Aussie retailers have launched a media campaign. They were clearly influenced by the success of the miners’ campaign against the Resources Super Profits Tax (RSPT). Except they forgot one very important thing… Click here for more…

Thursday: But speaking of non-robust and flaky, much to our surprise we received a reply to our Freedom of Information (FoI) request from the Reserve Bank of Australia (RBA). Click here for more…

Friday: This ‘George Soros tipoff’ could make you 226% to 389% in 24 months. (Just don’t share it with anyone else).

Kris Sayce

Kris Sayce

Publisher and Investment Director at Money Morning Australia

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Tactical Wealth, and Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.

Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.

Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.

After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

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119 Responses to “Why Australians Will Pay for Queensland’s Floods”

  1. dc

    And an illustrated version of what seems to be the same information.


  2. dc

    Whether Piper is guilty or innocent we’ll have to see, here is his latest podcast:

    The Piper Report Jan 10, 2011

  3. cb

    Thanks, DC. I have started to read that compilation and, if accurate, then it provides an answer as to why there was such a strong anti-Jewish sentiment in Germany after the first world war, something that Hitler and the Nazis then could capitalise on. It was a question of loyalty, and to be honest, I cannot see how any self-respecting nation would or could look kindly on the undermining of its interests. I was not aware, however, that International Jewry declared war on Hitler so early in the piece, in 1933. I thought it was much later, once the war had started. What is the truth of the matter here?

  4. dc

    cb – is that what Piper talks about in one of his podcasts? When he said international Jewry declared war on Germany?

    According to the information on the linked page, the economic war forced Germany to expand into its surrounding countries.

    As for the truth of the matter, yet it is true.

    The source material states:

    “Samuel Untermyer – a wealthy Jew with strong links to US leaders – broadcast an announcement that World Jewry was declaring economic war on Germany.”

    And Wikipedia confirms it:


    Untermyer publicly called for the political destruction of Germany in 1933. As quoted in the New York Times on Aug. 07, 1933, Untermyer exclaimed: “The Jews of the world now declare a Holy War against Germany. We are now engaged in a sacred conflict against the Germans. And we are going to starve them into surrender. We are going to use a world-wide boycott against them, that will destroy them because they are dependent upon their export business.”

  5. cb

    Thanks, DC. Very interesting, but accourding to “there is no bloody conspiracy,” Jewish bankers got on famously with Hitler.

  6. dc

    This might be useful in piecing together the events leading to WWII..

    THE NAMELESS WAR by Archibald Maule Ramsay

    Here is the story that people have said would never be written in our time — the true history of events leading up to the Second World War, told by one who enjoyed the friendship and confidence of Mr. Neville Chamberlain during the critical months between Munich and September, 1939.

    There has long been an unofficial ban on books dealing with what Captain Ramsay calls “The Nameless War”, the conflict which has been waged from behind the political scene for centuries, which is still being waged and of which very few are aware.

  7. peterquixote

    Yes all true.
    Here in Christchurch, after the shock ,there was a flush of excitement.
    The New Zealand assessors were granting local hick do it yourself repair merchants up to $NZ 5000 for filling and repainting over minor cracks in the walls .
    They were told to do so, by senior Government people .
    Because the money was coming from overseas Insurance brokers, and it was going to
    “boost the economy”.
    well the fast people got paid out fast, and then the flush of money slowed, now it is a trickle, and the refusals are more and more.
    Because those bloody Australian assessors came in and said
    “this is bullshit mate, these dudes are on the make”

    And they [ the Australian assessors] are being supported by the big overseas Insurance brokers.

    By the time they get to me I expect that the money will have run out, proving that you’ve gotta be fast,

    Please Australia conquer us as your eighth and ninth State< I promise I will make us obey your laws.

  8. Sam

    What happens to notes /money when it burns in the house?
    It gets replaced by Treasurery.
    How to compensate for other disatsters?
    Something similar?
    Compensation of ten million dollars to individuals and twenty million for corporations are most unreasonable by all means.
    In addition so much repitition of insurance.
    We need atleast half a dozen smart people to fix this insurance business.Some get nothing some get more than they have lost.

  9. David Stanton

    Why is everyone so keen on kicking the insurance companies over paying for flood damage?
    What about the responsibility of Local Government and State Governments around Australia who allow the development of land below the 100-year flood line. Land Developers seem to get off ‘scot-free’ they know the risks but no one seems to be prepared to knock them back.

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Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
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