Introductory Info

Date introduced:  9 February 2022
House:  House of Representatives
Portfolio: Treasury
Commencement: On Royal Assent

Purpose of the Bill

The purpose of the Treasury Laws Amendment (Cyclone and Flood Damage Reinsurance Pool) Bill 2022 is to establish a reinsurance pool backed by an Australian Government guarantee for cyclone damage, to be operated by the Australian Reinsurance Pool Corporation (ARPC). This will add to the ARPC’s existing function of operating a reinsurance pool for terrorism risk.

The Government’s intent is to indirectly reduce residential and small business property insurance premiums in cyclone-prone locations, primarily in northern Australia, by making it cheaper for insurance companies to reinsure their exposure to cyclone risks.

Specifically, the Bill will amend the Terrorism Insurance Act 2003 (proposed to be renamed the Terrorism and Cyclone Insurance Act 2003) to:

• make it mandatory for insurers that provide cyclone cover to reinsure all their contracted cyclone risk exposure with the ARPC (with minor exceptions)
• require the ARPC to seek to meet or offset future claims by charging sufficient (reinsurance) premiums to insurers participating in the pool; and if it cannot, provide a recourse to a $10 billion Australian Government guarantee (reinstated annually)
• specify how ‘cyclone events’ and associated ‘claims periods’ will be declared by the ARPC
• defer to regulations matters including:
  • the meteorological criteria defining a cyclone (in the Exposure Draft regulations, this is based on the typical characteristics of tropical cyclones)
  • an additional period after a cyclone ends, during which related damage commencing during that period would still be covered by the scheme (in the draft regulations, 48 hours)
  • the threshold for determining which insurers must subscribe to the reinsurance scheme based on their size, with reference to their income from premiums (in the draft regulations, insurers with total gross premiums of $10 million from policies that provide any sort of cyclone cover) and
  • the threshold for defining non-residential (eg business and not-for-profit) insurance policies for the purposes of inclusion in the scheme (in the draft regulations, policies covering up to $5 million are included).[1]

Background

Why are insurance premiums for natural disaster cover so high in some places?

The amount a consumer pays an insurer for insurance cover is called a ‘premium’. Insurers set a significant component of the premiums they charge based on their belief about the likelihood and probable size of claims. If an insurer considers a given property more likely to suffer damage (or likely to suffer more severe damage) than others, it will seek to reduce its financial risk exposure by charging a higher premium to offset the greater expected claims cost. Insurers will often also set a higher excess (ie how much damage the insured consumer must pay for themselves).

In addition to the risk to an individual property, insurers also ‘price in’ the risk that they might have to pay out many large insurance claims at once. While this is unlikely for many insured risks, such as theft or car crashes, it is highly likely in the case of disasters such as floods, bushfires, cyclones, severe storms and terrorist attacks. One way to manage the financial risk of providing natural disaster cover is simply to charge higher premiums in areas at risk; another is to pay a separate insurer to provide ‘reinsurance’, and recoup that cost through premiums.

Property owners in areas at high risk of natural disasters can therefore be charged very high premiums compared with national averages. This can lead to a significant level of under-insurance or non-insurance in disaster-prone communities, as insurance becomes unaffordable for those most likely to need to make a claim. In turn, under-insurance and non-insurance means that more of the cost of natural disasters must be borne by the victims of disasters (individuals, businesses or community organisations), and by governments in cases where victims cannot self-fund repairs and reconstruction. Without adequate insurance, it takes longer for local communities and their economies to recover after disasters.

What role do cyclones play in insurance unaffordability in northern Australia?

In May 2017, the Australian Government directed the Australian Competition and Consumer Commission (ACCC) to conduct an inquiry into the supply of residential home and contents insurance and strata insurance in northern Australia.[2]

The ACCC found that ‘Home and contents insurance premiums are considerably higher, and have risen faster, in northern Australia’ than elsewhere,[3] and that this was caused by the region’s higher risk of natural disasters.[4] The ACCC found that large, frequent natural disaster claims had resulted in insurers in northern Australia making net losses, with cyclones representing the largest claims expense category from 2008–09 to 2017–18.[5]

The ACCC identified the cost of providing cyclone cover as the largest driver of prohibitively high premiums for many property owners in northern Australia:

Premium components for cyclone, and in some places flood, make up a large proportion of technical premiums (the insurer’s expected cost to supply insurance plus a margin) in northern Australia. Cyclone premium components are high for many policies in northern Australia, but are particularly large in north Western Australia.[6]

Figure 4.9 (see page 6 of Digest) in the ACCC’s report illustrates the dominance of cyclone risk in two example insurers’ home and contents insurance policies in northern Australia compared with the rest of the country.

What is reinsurance and how does it affect premiums?

As explained in the Regulation Impact Statement for the Bill, ‘Reinsurance is insurance for insurers’.[7] In simple terms, the reinsurer – usually another insurance company – agrees to take on a portion of the liability if claims from a given type of disaster event (such as a natural disaster or terrorist attack) exceed an agreed threshold. The greater the risk the reinsurer takes on, the greater the premium it charges the client insurance company – which ultimately flows through to the premiums the latter charges its customers. Accordingly, reinsurance costs are one component of the premiums paid by consumers.

The ACCC’s investigations into insurance in northern Australia found that reinsurance was a significant component of premiums in some locations in northern Australia, such as Port Hedland, though on average far less significant than the cost of natural peril claims themselves, as shown by Figures 4.5 (below) and 4.6 (page 7 of Digest) in its final report.

Source: ACCC, Northern Australia Insurance Inquiry – Final Report (Canberra: ACCC, 2020), 76.

Source: ACCC, Northern Australia Insurance Inquiry – Final Report (Canberra: ACCC, 2020), 73.

Source: ACCC, Northern Australia Insurance Inquiry – Final Report (Canberra: ACCC, 2020), 74.

What solutions have been proposed previously?

Natural disaster insurance unaffordability has been considered by several inquiries, including:

• Treasury’s Natural Disaster Insurance Review (2011)[8]
• the Productivity Commission’s Inquiry into Natural Disaster Funding Arrangements (2014)[9]
• the inquiry by the Treasury’s Northern Australia Insurance Premiums Taskforce (2015)[10]
• the Royal Commission into Natural Disaster Arrangements (2020)[11]
• the ACCC’s Northern Australia insurance inquiry (2020)[12] and
• the inquiry by the Senate Select Committee on the effectiveness of the Australian Government’s Northern Australia agenda (Senate Select Committee) (2021).[13]

While different in focus and scope, these inquires all observed increases in insurance premiums in parts of Australia subject to natural disasters, and all grappled to some extent with the question of how to fix this – that is, how to keep natural disaster insurance affordable for most people – without creating different problems, such as financial unsustainability and moral hazard.[14]

Of those past inquiries, 5 considered reinsurance pools specifically, of which 2 (the Productivity Commission in 2014 and ACCC in 2020) did not support them,[15] 1 was cautious though not explicitly opposed (the Senate Select Committee in 2021),[16] 1 found that a cyclone reinsurance pool would be more feasible than a mutual cyclone insurer (the inquiry’s terms of reference specified that these two models be assessed) but emphasised the risks and limitations (Treasury’s Northern Australia Insurance Premiums Taskforce in 2015)[17] and 1 made a positive recommendation to implement such a pool, in the context of a more holistic package of measures (Treasury’s earlier Natural Disaster Insurance Review of 2011).[18]

Treasury’s Natural Disaster Insurance Review (2011) recommended an ‘integrated solution’ to flood insurance challenges, including premium discounts for homes in flood-prone areas, the national coordination of flood risk management and mitigation, and the provision of subsidised flood insurance premiums via a government-sponsored reinsurance facility, to be administered by a new national disaster risk and insurance agency.[19] Although the Review proposed that the reinsurance facility should also cover cyclone risk, it thought cyclone cover should not be subsidised (in contrast to flood cover), recommending instead that the need for cyclone cover subsidies in northern Australia be investigated in future.[20] The proposed model for the reinsurance facility differed from that envisaged by the present Bill.[21]

The Productivity Commission’s Inquiry into Natural Disaster Funding Arrangements (2014) warned against reinsurance pools, advising:

pooling risk or subsidising premiums for households (including through government-backed reinsurance) would reduce policy holders’ incentives to reduce their exposure to risks, either through mitigation or moving away from high-risk areas

and that government interventions in property insurance markets internationally had been ‘overwhelmingly ineffective’, creating ‘moral hazard as well as fiscal risks’.[22]

By contrast, the Commission noted ‘some evidence that large-scale mitigation measures have led to lower insurance costs’,[23] and recommended that the Australian Government increase mitigation funding to the states to $200 million a year, to be matched by the states.[24] It further noted ‘Evidence exists that cyclone building codes have reduced insurance premiums’,[25] particularly through reduced post-disaster reconstruction costs (expectations of which inform premium calculations). It cited evidence from Geoscience Australia on the impact of building code changes following Cyclone Tracy in 1974, estimating that the resulting improvements in building standards meant that if the same cyclone had re-occurred in 2008, the reconstruction cost would have been 90 per cent lower.[26] The Commission also strongly recommended the phase-out of state insurance taxes and levies, which it said ‘distort price signals and reduce affordability’.[27]

The inquiry by the Treasury’s Northern Australia Insurance Premiums Taskforce (2015) recommended a focus on mitigation measures to reduce the risk of cyclone damage, as ‘the only way to reduce premiums on a sustainable basis’.[28] The Taskforce also considered a reinsurance pool very similar to the model in this Bill and estimated it could achieve modest average reductions in premiums. It advised:

A reinsurance pool which charged premiums to cover the estimated long-run cost of claims from cyclones and was supported by a Government guarantee might offer a premium reduction for consumers of 10–15 per cent. … The 10–15 per cent premium reduction under a partially funded scheme refers to the average reduction in total consumer premiums … [but] policyholders with high cyclone risk should receive discounts above the average and policyholders with low cyclone risk will receive smaller discounts.[29]

However, the Taskforce warned that ‘it would be difficult to ensure that the reduction in insurer costs was fully passed through to consumers’.[30]

The Royal Commission into Natural Disaster Arrangements (2020) did not consider reinsurance. It did note that ‘reducing risk by undertaking mitigation and resilience activities should help lower insurance costs and premiums’, though large-scale measures (such as the construction of flood levees) appeared to have greater effect than individual mitigation investments.[31] The Royal Commission also recommended that governments consider previous recommendations to abolish taxes on insurance products.[32]

The ACCC’s Northern Australia Insurance Inquiry (2020) conducted a comprehensive investigation into home and contents insurance pricing and its drivers in northern Australia. The ACCC recommended against reinsurance pools:

We do not consider government reinsurance pools or government insurers are well-suited to address affordability concerns in a targeted way. … The potential for government insurers and reinsurance pools to lower premiums without the government subsidising the insurer in some way is uncertain, and any premium reductions may not be significant. These measures cannot be targeted to consumers most in need, and would transfer significant risks from insurers and reinsurers to governments.[33]

Instead, the ACCC recommended direct premium subsidies as having ‘the greatest potential to work in a targeted way to relieve some of the acute insurance affordability and cost of living pressures for households drawn to live and work in these regions’, also calling for greater consideration of mitigation and resilience-building measures, which would ‘have significant benefits now and into the future, including through lower insurance claims costs’.[34]

The inquiry by the Senate Select Committee (2021) noted support for a reinsurance pool from several witnesses, but concern or opposition among others – including the ACCC, the Insurance Council of Australia (ICA) and Suncorp – about reinsurance schemes’ ‘cost, complexity and effectiveness’.[35] The final report made no recommendation one way or the other regarding a reinsurance pool, however it did recommend increased Australian Government investment in disaster mitigation.[36]

How does climate change fit in?

The Senate Select Committee (2021) stated that ‘climate change will continue to increase the risk and associated costs of natural disasters, particularly in volatile areas such as Northern Australia’.[37]

Similarly, the 2020 Natural Disasters Royal Commission Final Report noted (unpublished) evidence from the Reserve Bank of Australia (RBA) that ‘inflation-adjusted insurance claims for natural disasters in the current decade have been more than double those in the previous decade’ nationally.[38] The Commission relayed that:

The RBA expects that the insurance industry will be increasingly exposed to natural hazard risk as the climate changes. The RBA expects that this impact will grow over time, and may create barriers to efficiently pricing insurance[.][39]

Although climate change is making natural disaster insurance more unaffordable generally, there is not a direct link between climate change and the policy intent of this Bill, as currently drafted.

This is firstly because the understanding and framing of the policy problem targeted by the Bill has been developed through a northern Australia lens, rather than broader concern over growing natural disaster risk (and insurance costs) nationally. Some members of the Australian Government and stakeholders have referred to the reinsurance pool as the ‘Northern Australia Reinsurance Pool’[40] or ‘North Australian Reinsurance Pool’,[41] reflecting the sustained policy focus on long-standing cost pressures in northern Australia, from which this Bill evolved. The reason for the decision to target cyclone insurance specifically was the ACCC’s finding in 2020 that cyclones are the main cause of the higher insurance premiums charged in northern Australia.[42]

Secondly, while climate change that has already occurred may have contributed indirectly to rising cyclone insurance premiums to date, and while the balance of expectations is that climate change will lead to higher cyclone costs in future, the pattern is not yet as clear as for other types of natural disasters.

The ACCC’s 2020 report stated:

We have not seen insurers explicitly adjusting their pricing models for climate change effects but, they do still take the effects of climate change into account … because insurers’ models rely on historic data, which means that to the extent that climate change has affected past weather patterns, it will implicitly be included in insurers’ prices. … Two insurers also stated that climate change risk and their associated cost allowances will be incrementally incorporated into premiums as customers renew their premiums … [W]e have seen indications that insurers are taking steps to better model the future effects of climate change. … Another insurer indicated to the ACCC that there will be increased costs relating to cyclone, storm and flood as a result of climate change effects, although it also considered that it would ‘take many years for the impact to become obvious.’[43]

The latest climate modelling on cyclone impacts is less clear-cut than for floods and bushfires, making it more challenging to anticipate how its impact on premiums will play out. Floods and fires have become more frequent and severe, and are expected to become more so[44]; by contrast, the Natural Disasters Royal Commission has reported:

Climate models project a future decrease in the total number of tropical cyclones, but an increase in their intensity. However, large natural variability and data limitations make it difficult to be entirely confident about long-term trends in tropical cyclones. Despite this, coastal impacts from tropical cyclones are likely to become worse, due to rising sea levels and increases in cyclone-related extreme rain and wind events. Additionally, the latitude at which tropical cyclones reach their maximum lifetime intensity may be shifting poleward (in Australia, towards the south), and a further movement poleward is possible in future. [emphasis added][45]

The probable trend of fewer but more damaging cyclones is likely to be re-affirmed in the Australia and New Zealand chapter of the Intergovernmental Panel on Climate Change (IPCC) 6^th Assessment Report, whose final draft broadly reflects the above CSIRO advice.[46]

The IPCC draft chapter on Australasia also cites research published in the scientific journal Nature in 2018 (among others) indicating that climate change appears to be making cyclones travel more slowly – in Australia, the speed at which cyclones advance over land has already decreased by 22 per cent from 1949 to 2016.[47] This slow-down in ‘translation speed’ is likely to compound the effects of expected higher rainfall rates during cyclones under climate change, leading to higher local rainfall totals and flooding; the research cites the example of Hurricane Harvey, which ‘stalled’ over Texas in 2017 and produced unprecedented rainfall totals.[48] If this apparent slowing trend persists, it may have particular implications for the design of the ‘claims period’ under the Bill and associated regulations, discussed under ‘Key issues and provisions’.

What is the Australian Reinsurance Pool Corporation (ARPC)?

The ARPC is a corporate Commonwealth entity established by the Terrorism Insurance Act in response to a ‘market failure, which occurred following the terrorist attacks in the United States on September 11, 2001 that resulted in global reinsurers refusing to underwrite commercial property damage caused by acts of terror’.[49] The ARPC was created to fill this gap by administering a reinsurance scheme backed by a $10 billion Commonwealth guarantee for ‘eligible terrorism losses, involving commercial property, associated business interruption losses and public liability’.[50] Though the Terrorism Insurance Act does not make it mandatory for insurers to participate in the pool, it compels all insurers to provide full terrorism cover on eligible policies, with a choice between retaining all the risk themselves, purchasing reinsurance from the ARPC or purchasing reinsurance on the private market (which remains scarce and often commercially unaffordable).[51]

The ARPC charges (reinsurance) premiums to client insurance companies; these are the source of the ‘pool’ from which the ARPC meets claims, with the Australian Government guarantee as a back-up should the pool prove inadequate.[52] At January 2020, the value of the terrorism reinsurance pool was just under $14 billion.[53] To date, there has only been one terrorist incident in the scheme’s history: the Lindt Café Siege in Sydney in 2014,[54] which resulted in 92 claims to the ARPC from 20 insurers, totalling $2.3 million.[55]

The ARPC calculates terrorism reinsurance premiums as a percentage of a client company’s gross base premium,[56] charging lower premiums for low-risk areas (eg rural areas), intermediate premiums for medium-risk areas (eg suburban areas) and the highest premiums in the highest-risk areas (major city CBDs).[57]

On 4 May 2021, the Australian Government announced its intention to task the ARPC with establishing an additional reinsurance pool for cyclone and cyclone-related flood damage.[58]

Committee consideration

Senate Economics Legislation Committee

The Bill was referred to the Senate Economics Legislation Committee for inquiry and report by 24 March 2022. The Committee received 22 submissions and held a hearing examining the provisions of the Bill on 8 March 2022.[59]

The Committee tabled its report on 24 March 2022 and recommended that the Bill be passed.[60]

While supporting the Committee’s recommendation, Labor Senators raised issues with the implementation of the reinsurance pool scheme and called on the Government to increase funding for disaster mitigation.[61]

Liberal Senator Andrew Bragg also provided additional comments, focusing on the need to ensure that the scheme was not extended beyond its intended areas of operation.[62]

In his additional comments, Greens Senator Nick McKim advised that that Greens would be seeking to amend the Bill in the Senate, and recommended changes to ensure the scheme would cover all flood damage (not just from cyclones) and eventually all climatic events, and be funded by a levy on fossil fuel companies (see also ‘Policy position of non-government parties/independents’).[63]

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills had no comment on the Bill.[64]

Policy position of non-government parties/independents

Since the Bill was introduced, Members of Parliament on both sides have expressed growing concern about the fairness of excluding other types of flooding and other natural disasters from the scheme.

Awareness of the problem of insurance unaffordability for bushfire and flood-affected communities has been heightened by catastrophic (and cyclone-unrelated) flooding across south-east Queensland and north-east New South Wales in late February and early March 2022,[65] including within the Government.[66] Longstanding calls for a stronger Government focus on mitigation and resilience-building in order to future-proof homes and infrastructure against climate change have also gained attention.

Australian Labor Party

The Australian Labor Party (ALP) has supported passage of the Bill through the House of Representatives, while raising certain criticisms.

During the second reading debate on the Bill, the ALP Member for Kingsford-Smith, Matt Thistlethwaite, stated that the ALP supported the Bill on the basis of the need to address rising insurance costs and under-insurance due to climate change.[67] However, he noted the ACCC’s 2020 recommendation against reinsurance pools as a preferred policy solution for insurance unaffordability, and criticised the Government for not acting on the ACCC’s other recommendations.[68] He also accused the Government of waiting ‘until the dying days of this parliament to try and ram through this legislation’,[69] challenged Government figures indicating the potential for very substantial premium savings[70] and called for greater investment in mitigation.[71]

In her contribution to the debate on the Bill, the ALP Member for Macquarie, Susan Templeman, argued that the Bill should only represent the ‘the start of tackling insurance problems for places outside northern Australia’.[72] She called for ‘a much more continent-wide approach’ to this issue.[73] Ms Templeman noted that in her electorate, ‘the Hawkesbury and Blue Mountains residents are facing extraordinary increases in insurance costs, to a point that many cannot afford it, because of the increasing frequency and severity of fires and floods’.[74]

ALP Members of Parliament have expressed cautious support for expanding the reinsurance scheme to include all types of flooding, raised in the aftermath of the February–March 2022 east coast floods, but have stressed the need for further detail about the scheme from the Government before committing to support such an expansion, as well as consideration of broader policy responses to natural disaster risk.[75]

Australian Greens

At the time of writing, the Greens had announced their intention to amend the Bill in the Senate to expand the scope to cover all types of flooding, and to fund the scheme through a levy on fossil fuel companies.[76] Greens leader Adam Bandt stated:

The scope of the government’s bill is too limited. Damage from the [record-breaking February–March 2022] floods in QLD and NSW would not be covered by the government’s legislation as they are not cyclone related floods. The Greens’ amendments would ensure that the NSW and Qld floods would be covered, and would keep insurance premiums for people impacted by these floods lower in the future.[77]

Bandt also called for a statutory review to consider nationalising reinsurance for all climate-related property damage nationally.[78] This built on questioning by Greens Senator for Tasmania, Nick McKim, during the 8 March 2022 public hearing of the Senate Economics Legislation Committee’s inquiry into the Bill. Senator McKim questioned whether it was equitable to target premium relief only to people and organisations exposed to cyclone risk, but not to those exposed to other types of natural disaster risk facing similarly high premiums:

… people in my home state of Tasmania are cross-subsidising the insurance cost costs of people in cyclone affected areas. Why is that equitable and why shouldn't this scheme be extended to cover all weather related disasters in Australia?[79]

Katter’s Australian Party

The Member for Kennedy, Bob Katter MP, applauded the introduction of the Bill.[80] Mr Katter predicted that ‘really the government are providing a reinsurance pool that they will never need to dip into very much at all, because the houses that are there now will withstand any cyclone that nature wants to throw at us’ thanks to strengthened building codes (and older properties having already been destroyed by past cyclones, and replaced with stronger ones).[81]

Position of major interest groups

Summary

Broadly, the basic model of the reinsurance pool has been supported by:

• large insurance companies and peak bodies that commented on the Bill or Exposure Draft (despite several having opposed reinsurance pools per se in past inquiries)
• local councils in northern Australia
• chambers of commerce and regional development organisations in northern Australia
• small business advocates
• most real estate industry representatives who have commented to date.

However, while supportive of the scheme in principle, most stakeholders have also raised substantive concerns about the details.[82] Issues raised regarding specific provisions in the Bill or associated draft regulations are addressed under ‘Key issues and provisions’ in this Digest.

Insurance industry

The insurance industry’s position on the idea of a reinsurance pool has evolved since the idea was first tested during past inquiries.

Significant industry stakeholders were vigorously opposed to introducing a reinsurance pool in the context of past inquiries. For example, Suncorp had previously stated, ‘We are opposed to spending Australian taxpayers’ money on hiding the problem when we need to be spending the money on solving the problem by making our communities more resilient’, while the ICA had said a taxpayer-funded mutual or a reinsurance pool would be an expensive and unnecessary interference in the market.[83]

The ICA,[84] along with major insurers including Allianz,[85] the Insurance Australia Group (IAG),[86] the Royal Automobile Club of Queensland (RACQ),[87] and Suncorp,[88] have now offered qualified support for a reinsurance pool, notwithstanding concerns about how it will operate.

Allianz, the IAG, ICA and RACQ have called for an additional focus on mitigation and resilience building as an urgent priority, within and/or beyond the reinsurance scheme.[89] The ICA also called for increased funding for mitigation, for resilience criteria to be incorporated into building codes and for land planning reforms.[90] Insurers’ call for significant investment in mitigation and resilience has also been backed by the National Insurance Brokers Association.[91] The ICA and RACQ also reiterated the need to reform taxes on insurance products, consistent with the recommendations of previous inquiries.[92]

The industry has also raised concerns about the projected premium savings for end customers. Prime Minister Scott Morrison said in May 2021 that he ‘would hope to see at least a 10 per cent fall’ in premiums under the scheme, ‘and better’, as a ‘conservative’ estimate.[93] In February 2022, the Government announced that updated modelling showed home-owners in the most at-risk areas could receive premium savings of up to 46 per cent; owners of strata properties, up to 58 per cent; and small businesses, up to 34 per cent.[94] The Government has declined to release substantive details about the modelling underlying these numbers, claiming public interest immunity; ALP Senator Murray Watt sharply criticised this decision.[95]

In response to these premium savings projected by the Government, the ICA, RACQ and Suncorp have all warned that the flow-on impact on premiums cannot be estimated until after the ARPC determines its pricing formula for reinsurance premiums, and insurance companies renegotiate their existing contracts with private market reinsurers.[96] More concretely, the RACQ’s submission to the Senate Economics Legislation Committee’s inquiry into the Bill warned that premium reductions of up to 46 per cent would represent ‘a significant reduction for an initiative that is largely relying on forgoing profit margins to provide savings’.[97] The National Insurance Brokers Association’s submission to the Senate Committee noted that ‘NIBA has previously raised concerns about the level of savings that the reinsurance pool is expected to provide’ as ‘Reinsurance costs make up a very small portion of total premiums’:

Whilst savings as high as 50% have been touted by government, NIBA estimates that the real saving that will be delivered to policyholders is more in the range of 10-15%. While this saving may provide reprieve to some consumers for many, the saving delivered will not be sufficient to keep businesses open and family homes insured.[98]

The ICA’s submission also sought to manage expectations:

Expected premium savings should be understood in commercial context. Insurers already have reinsurance treaties in place, often with global reinsurers. Such treaties are typically taken out on a ‘whole of book’ basis, meaning that Australian insurers are quoted a reinsurance price for all risks within their portfolio. As the reinsurance pool would cover one particular risk, insurers will need to negotiate specific carve-outs to avoid paying twice for the same risk and may lose diversification benefit in doing so. Premium reductions will therefore be driven by the ability of insurers to capture savings through commercial re-negotiations. There may not be a direct pass-through of theoretical savings. For example, a global reinsurer may have been offering discounted rates on the cyclone risk component of the reinsurance treaty to secure the overall business, or they may simple have a different (lower) view of the value of cyclone risk being ceded to the ARPC. In that circumstance, the insurer may not be able to realise the full theoretical savings. The precise quantum of premium savings will begin to be seen when insurers are able to enter the reinsurance pool, in line with the transition period.[99]

Sure Insurance (a smaller insurance company founded in 2019 specifically to address the insurance needs of regional Queensland) warned that it expects the scheme, as currently designed, to increase their own customers’ premiums – unless it is amended to include a ‘no disadvantage test’ that would allow insurers who can provide cheaper premiums outside the scheme to continue to do so.[100] Sure Insurance acknowledged however that this would undermine sustainability advantages from pooling more expensive, higher risk insurance policies together with less expensive, lower risk policies for the purposes of the scheme.[101]

The ICA and RACQ raised further concerns with the scheme’s low predicted regulatory compliance costs of just $440,000 (according to the Regulation Impact Statement).[102] The ICA warned the Committee ‘we are concerned that the estimated implementation costs are unrealistically low’,[103] while the RACQ advised it believed it would ‘need to spend significantly more than this amount on its own to get our systems and processes ready to participate in the pool’.[104]

Northern Australia interest groups

The scheme has strong in principle support among northern Australia interest groups, though concerns have been raised regarding details.

The Northern Australia Insurance Lobby, representing insurance buyers in north Queensland, supported the scheme and recommended the Bill be passed, despite its concerns about the details, as ‘getting something passed now as a starting point is always better than having nothing passed at all’.[105] Its main concern was that the eligibility criteria for the scheme were too narrow, as discussed under ‘Key issues and provisions’.

The Townsville Chamber of Commerce and Industry and Regional Development Australia (RDA) Townsville and North West Queensland commended the introduction of the Bill but wanted additional rules to require insurers to provide insurance for all of Australia (ie make it illegal for insurers to refuse to service certain geographical areas), and the creation of a ‘National Insurer’ to provide a guaranteed minimum baseline of insurance for all Australians.[106] Townsville Enterprise Ltd also welcomed the scheme.[107]

The Northern Territory Chamber of Commerce,[108] the Chamber of Commerce and Industry Queensland,[109] the Mackay Region Chamber of Commerce,[110] and the Greater Whitsunday Alliance[111] offered qualified support for the scheme, while raising concerns about its operation. The Northern Territory Chamber of Commerce recommended expanding the scheme to ‘catastrophes Australia-wide’,[112] noting its ‘concerns that without expanding the pool to be national and ensuring the appropriate scope, … the predicted savings should be viewed as optimistic and … not supported by the release of any modelling data’.[113]

The North Queensland Regional Organisation of Councils welcomed the attention on high insurance costs but expressed the view that the reinsurance pool ‘should provide reinsurance for all severe weather events that take place in Northern Australia, including seasonal flooding, storm events, low pressure events, storm surges and droughts’.[114]

Real estate industry and bodies corporate

The Community Housing Industry Association,[115] Property Council of Australia (including its Retirement Living Council division)[116] and Real Estate Institute of Queensland[117] support a reinsurance scheme, although the Community Housing Industry Association and Property Council of Australia have also raised concerns with specific eligibility provisions (addressed under ‘Key issues and provisions’). The Strata Community Association called for the Bill to be passed in its current form, though it also stressed the importance of mitigation.[118]

By contrast, Scentre Group (ie Westfield) and the Shopping Centre Council of Australia advocated strongly against the scheme, based on concerns the Bill may allow for the ARPC’s terrorism reinsurance pool – which their members have helped build up over many years through premium payments – to be used to cross-subsidise the cyclone reinsurance pool.[119]

Other stakeholders

The Cyclone Testing Station at James Cook University warned:

It is important that the pool is not just about making more premiums more affordable, but acts in a way to improve resilience, and not making current levels of poor resilience seem acceptable… The objectives [of the Bill] … are only going to be met if the actual risk is reduced and the only way to reduce risk is to improve the resilience of buildings, both new and existing.[120]

While the Government has announced that ‘Over time, the pool will offer discounts for policies that cover properties that have undertaken cyclone and flood mitigation’,[121] this is not incorporated into the Bill or draft regulations.

The Australia Institute argued that the Bill as currently formulated is inequitable and addresses only a small part of the growing problem with natural disaster insurance affordability:

the risk of natural disasters is increasing in all parts of Australia. This was made abundantly clear by the unprecedented Black Summer bushfires but is also true of flooding not caused by cyclones (that are currently being experienced and would not be covered by this bill), heatwaves, drought and coastal inundation. It is deeply inequitable to subsidise insurance premiums for one region (Northern Australia) for one type of disaster (cyclone related flooding).[122]

The Australia Institute also questioned whether the scheme would truly be cost neutral to the Government based on the experience of government reinsurance schemes in overseas jurisdictions, and argued that if not, it ‘simply shifts the risk from insurers to taxpayers’.[123]

Financial implications

The Government considers that the Bill will have no direct financial impact, as the scheme is ‘designed to be cost-neutral to the Government over time’.[124] The ARPC is expected to meet the future cost of claims through the (reinsurance) premiums it will charge participating insurance companies.

Despite the scheme nominally being cost neutral, it has the potential to affect the Commonwealth’s fiscal position if the Australian Government’s $10 billion annual guarantee needs to be called upon to meet reinsurance claims. In the language of the Explanatory Memorandum, ‘The guarantee supporting the reinsurance pool is an unquantifiable contingent liability’.[125] That is, the scheme will only affect the fiscal or underlying cash balance if the guarantee is called on, but it is not possible to quantify the potential impact if that does happen.

Past Treasury modelling provides insight into the likelihood of a fiscal impact. Treasury’s Northern Australia Insurance Premiums Taskforce considered a reinsurance pool model very similar to the one in this Bill, based on a reinsurer that would charge premiums to meet all anticipated costs, but backed up by an Australian Government guarantee should the pool created by these premiums prove inadequate.[126] Based on its modelling at the time, Treasury estimated that if such a reinsurance pool operated over 10 years, there would be a:

• 50–60 per cent chance that the Government guarantee would be called on at least once;
• 30–40 per cent chance that the scheme would cost the Government money when closed (that is outlays under the guarantee would exceed reserves returned to the Government when the scheme is wound up);
• 10–20 per cent chance that the scheme would, over a 10 year period, cost the Government more than $2 billion; and
• 5–10 per cent chance that the scheme would, over a 10 year period, cost the Government more than $5 billion.[127]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011, the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.[128] The Government considers that the Bill is compatible and that it ‘engages and promotes, or may engage and promote, the right to an adequate standard of living’.[129]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights had no comment on the Bill.[130]

Key issues and provisions

Establishment of a cyclone and related flood damage reinsurance pool

Item 9 inserts proposed Part 2A into the Terrorism Insurance Act 2003 which establishes the legal scope and basic operation of the cyclone reinsurance pool.

Requirement to reinsure cyclone risks

Proposed subsection 8A(1) requires ‘general insurers’ providing cyclone cover under ‘pool insurance contracts’ to take out reinsurance contracts with the ARPC that completely cover their liability for all eligible cyclone losses under all such insurance policies.[131] The scheme would be open from 1 July 2022. The rule would apply even if insurers have existing private reinsurance contracts.[132]

Item 1 of the Bill amends the Insurance Act to introduce a civil penalty of 1,000 penalty units ($222,000) for insurers that are required to take out reinsurance with the ARPC but fail to do so.[133] Pecuniary penalties may also be imposed on insurers for failing to reinsure with the ARPC.[134]

Proposed subsections 8A(5) and 8A(6) of the Terrorism Insurance Act 2003 provide an exemption for small insurers whose total gross premiums (as reported to the Australian Prudential Regulation Authority (APRA) during the previous financial year)[135] from eligible insurance contracts were below a certain dollar threshold, to be set by regulations. The draft regulations provide a threshold of $10 million.[136] This exempts insurers with minimum exposure to policies covering eligible cyclone risks.[137] However, proposed subsection 8A(8) stipulates that if an exempt insurer chooses to reinsure some of its cyclone liabilities with the ARPC, it must reinsure all such liabilities (the ‘one in, all in’ rule).

Proposed subsection 8A(7) allows for the ARPC to declare exempt geographic areas where cyclone risk will be considered negligible for the purposes of the participation rules.

Proposed subsections 8A(9) and (10) state that Lloyd’s underwriters and unauthorised foreign insurers are not required to participate in the scheme, but may do so voluntarily on the same ‘one in, all in’ basis as general insurers.

Stakeholder views

The Business Council of Co-operatives and Mutuals expressed concerns that ‘by omission, the Bill in its present form excludes discretionary risk mutuals’ and as a result, ‘discretionary risk mutuals may be inadvertently displaced from northern Australian markets because they will not be able to compete on a level playing field with insurers who are able to participate in the Reinsurance Pool’.[138] Capricorn Mutual expressed similar concerns and recommended that the Bill be amended to include mutual and mutual risk products or to permit indirect reinsurance of mutuals.[139]

Treasury has confirmed that ‘in the current construction of the legislation, they [Capricorn Mutual] would not be included in the policy setting’, explaining that discretionary risk protection is ‘not an insurance product’, and that an expanded scheme incorporating discretionary risk mutuals would be ‘a very different product’.[140] Treasury flagged possible future work on this issue.

Meaning of ‘pool insurance contracts’

A ‘pool insurance contract’ refers to the types of insurance policies that will be eligible for cyclone risk reinsurance with the ARPC.

An insurance policy is a ‘pool insurance contract’ to the extent that it:

• provides insurance cover of a kind specified in proposed subsection 8B(2) and 8B(3) or
• is prescribed by the regulations.[141]

The Explanatory Memorandum notes that the regulation-making power is required ‘to ensure the Government can make timely changes’ with respect to ‘the scope of the cyclone reinsurance scheme’, and the regulations will be disallowable instruments.[142]

Proposed subsection 8B(2) effectively restricts pool insurance contracts to policies covering property loss/damage and, in the case of businesses, business interruption and consequential loss arising from property loss/damage or the inability to use property owned or occupied by the insured (eg leased business premises).

Proposed subsection 8B(3) further restricts the definition to policies covering three principle categories of risks:

• insurance policies for ‘home building’ and/or ‘contents’ insurance[143]
• insurance policies for ‘building’ and/or contents insurance held by the body corporate for a strata or community title development where at least 50% of the total floor space is used for residential purposes[144] and
• non-residential building and/or contents insurance policies up to a threshold value to be set by regulations (the ‘sum insured’ test).[145]

The draft regulations specify a threshold of $5 million for eligible non-residential insurance policies,[146] with the intention to provide cover for small businesses, not-for-profits, community organisations and similar entities.[147] The Bill provides that the terms ‘building, ‘contents’ and ‘home building’ will be defined in the regulations.[148]

Proposed subsections 8B(5)–(9) list exemptions to the above criteria.

For example, proposed subsection 8B(6) has the effect of barring reinsurance for the residential property component of a larger mixed residential and non-residential insurance policy if the total sum insured under the non-residential coverage is more than the threshold (as set in the regulations). For example, if the threshold was set at $5 million and an insurance policy provided $5.1 million in non-residential property cover to a business owner, plus cover for a residential flat above a shop, the entire policy (including the residential component) is not eligible for pool coverage, even if the residential component would have been eligible if it were in the form of a standalone home insurance contract, or if the value of the non-residential coverage was only $4.9 million.

Proposed subsection 8B(7) contains further exclusions, most notably paragraph 8B(7)(b), which excludes non-residential insurance for farms and farm businesses of any size. The portion of an insurance policy covering a family home located on a farm and its contents would be eligible for reinsurance under the scheme, but nothing else. There are explicit exclusions for insurance covering businesses producing crops, livestock or produce derived from crops/livestock and any on-site processing or manufacturing using farm produce, including property used in these operations.[149]

Stakeholder views

Many interest groups have raised concerns about the implications of the proposed eligibility criteria for tourist accommodation property, aged care and retirement facilities, and small businesses.

For example, the Northern Australia Insurance Lobby (NAIL) warned these provisions would exclude many ‘mum and dad’ investment properties (apartments) in module buildings under strata title used for short-term tourist accommodation (AirBNBs and other short-term holiday rentals), because the Bill treats such properties as non-residential.[150] NAIL argues that many such strata complexes would exceed the sum insured test, precluding any benefit to the owners from the scheme.[151] NAIL has argued this will reduce the scheme’s ability to effect premium relief in tourism hotspots, particularly on Hamilton Island.[152]

Retirement homes and aged care facilities are also treated as commercial property for the purposes of the Bill, and as such they are also subject to the proposed ‘sum insured’ limit. NAIL and the Property Council of Australia have raised concerns that as aged care providers pass on higher insurance costs to their clients, the exclusion of any retirement village or nursing home portfolio insured for more than the ‘sum insured limit’ will mean there is no pass-through of benefit to residents.[153] The National Insurance Brokers Association also raised this concern, noting that the ‘sum insured’ test applies regardless of whether the facility is run on a commercial basis or as a not-for-profit/community organisation.[154]

By contrast, the Community Housing Industry Association has called for an explicit provision that social/affordable rental housing be considered ‘business premises’ for the purposes of the Bill, to ensure such housing providers can participate at all.[155] It also raised the need to clarify whether Aboriginal Shire Councils that serve as Indigenous Community Housing Organisations would be covered by the scheme.[156]

Stakeholders have raised concerns as to whether the proposed $5 million sum insured threshold in the draft regulations is too restrictive. Allianz had previously called for a $15 million sum insured threshold.[157] NAIL had called for a $10 million to $20 million threshold.[158] However, Allianz now supports the $5 million test,[159] and NAIL supports passing the Bill in its current form but calls for monitoring of the operation of the $5 million threshold in future reviews of the amended Act.[160] The Australian Small Business and Family Enterprise Ombudsman also flagged concerns the sum insured threshold was too low.[161]

The ICA further warned in its December 2021 submission to Treasury of the ‘potential for gaming by policyholders who may split their policies as well as the incentive for under-insurance where policyholders may seek to utilise the eligibility threshold for the pool’.[162]

In addition, the RACQ has called for the inclusion of motor vehicle insurance (on the rationale that this will simplify implementation for participating insurers),[163] and the Small Business and Family Enterprise Ombudsman has called for the immediate inclusion of marine assets (noting however that the Government has announced that coverage for small business marine property insurance policies will be included from 1 July 2023).[164]

In its submission to Treasury, the Queensland Farmers Federation (QFF) welcomed the proposed reinsurance pool but objected to the exclusion of almost all farm assets.[165] The QFF requested that the Government explain and review the exclusion and advise on when farm assets could be included in the future.[166] The QFF’s submission also drew attention to the potential of mutuals to better meet farmers’ insurance needs[167]; however, as discussed above, discretionary mutual funds would be precluded from participating in the scheme.

An insurance broker who submitted to the Senate inquiry into the Bill argued that the specific exclusion of farmers’ business assets introduced an arbitrary inequity:

many farmers have extensive investments in substantial Machinery sheds. They can also have expensive plant for example on-farm produce processing and packing equipment, cold rooms etc. If these buildings were located in a township’s industrial estate the building and nonmobile contents would be eligible up to the current $5 Million[.][168]

Setting insurance premiums for cyclone reinsurance contracts

Proposed section 8D sets out the principles the ARPC must follow when setting premiums to be paid by insurance companies for cyclone reinsurance contracts with the ARPC.

Proposed paragraph 8D(a) requires the ARPC to seek to charge premiums sufficient, over the long term, to cover ‘or offset’ claims pay-outs and its operating expenses.

The wording of this requirement is weaker than a requirement to achieve cost neutrality to the Australian Government in the long run. The requirement for the ARPC to only ‘offset’ costs is consistent with past Treasury modelling indicating a 30 to 40 per cent probability that a reinsurance scheme following the same cost recovery principles as the current proposal would fail to recover all its costs over a 10-year operating period.[169]

Proposed paragraph 8D(b) requires the ARPC to set premiums (for reinsurance contracts) for policyholders at risk of medium to high levels of exposure to eligible cyclone losses as low as possible while maintaining incentives to reduce and mitigate the risk. The intention is that more heavily discounted reinsurance costs in medium to high risk areas will flow through to greater reductions in premiums for policyholders in that area.

Proposed paragraph 8D(c) requires the ARPC to set reinsurance premiums for policyholders at low risk of exposure to eligible cyclones losses at comparable levels to those offered on the private market.

Separately from the Bill and draft regulations, the Government has tasked the ACCC with undertaking price monitoring to assess whether savings to insurers through reduced reinsurance costs are passed on to end-consumers as premium reductions.[170] The Government has also announced that the pool will cover all eligible claims above the policyholder’s excess for the first three years. Then the pool will operate on a risk-sharing arrangement with insurers, to allow a staged transition to a limited level of risk retention by the insurers.[171]

Stakeholder views

Stakeholders have raised concerns about the feasibility and equity of this model (also discussed above under ‘Policy position of non-government parties/independents’ and ‘Position of major interest groups’).

The Cyclone Testing Station at James Cook University further warned of moral hazard, stating that ‘The concept of providing higher discounts for higher risk properties … may work against the aim of encouraging owners of less resilient properties to undertake mitigation recommendations’.[172] The Australia Institute similarly warned that this feature of the Bill ‘encourages maladaptation … If the bill does result in lower insurance premiums for insurance buyers, it will exacerbate the problem by encouraging people to live in disaster prone areas, almost inevitably leading to more property damage, injuries and fatalities’.[173]

The ACCC had also previously raised concerns about whether such a model could target those most genuinely in need:

the beneficiaries of lower reinsurance costs may not be those consumers who are facing the most acute premium pressures. High-risk policyholders that can benefit from a pool or scheme may range across a wide socio-economic spectrum as it would be difficult for insurers to reinsure properties differently based on the customers’ incomes. At one end of the spectrum are people of low socio-economic means, who do not have the capacity to move to less risky locations or afford higher premiums. At the other end are those who have the socio-economic means, but who by choice live in desirable but highly risk-exposed areas.[174]

Eligible cyclone loss

Proposed section 8C specifies that losses must arise from either:

• a declared cyclone event under proposed subsection 8F(1) or
• damage by wind, rain, rainwater or rainwater runoff, storm surge or flood caused by that weather system (without limiting generality).

The loss must commence before the end of the associated ‘claims period’ (see below), though it may continue beyond the end of the claims period.[175]

Proposed subsection 8E(1) requires the BoM to notify the ARPC when it determines that a cyclone exists (or has re-intensified) that has potential to affect any part of Australia. The BoM must also notify the ARPC when a cyclone ends.[176] It must make these notifications as soon as possible, and within 24 hours at the latest.[177] The Bill provides that the term ‘cyclone’ and the ‘end’ of a cyclone will be defined by the regulations.[178] The current definition of a ‘cyclone’ in the draft Regulations is modelled on tropical cyclones.[179]

Proposed section 8F covers the ARPC’s responsibility for declaring a ‘cyclone event’ and the associated claims period for the purposes of reinsurance contract liabilities under the Bill. Proposed subsection 8F(1) requires the ARPC to declare the start of a cyclone event and the start of the associated claims period based on the date and time provided by the BoM (under proposed section 8E). Proposed subsection 8F(2) similarly requires the ARPC to declare the end of the cyclone event according to the BoM’s notification of when the cyclone ‘ended’ (i.e. when it was downgraded), and declare when the associated claims period ended, or will end. Proposed subsection 8F(3) states that regulations will determine how long the claims period extends after a cyclone ‘ends’, with the current draft regulations specifying 48 hours.[180]

Proposed subsection 8F(4) requires ARPC cyclone event and claims period declarations to be made as soon as practicable (within 24 hours of the relevant BoM notification, at the latest) by notifiable instrument and published online, and states that these declarations cannot be varied or revoked. If a cyclone was downgraded, leading the ARPC to declare the end of a cyclone event, but then reintensifies, this would trigger the declaration of a new cyclone event.[181]

Proposed subsection 8F(5) states that declarations will be valid even if they contain errors and do not comply with the requirements discussed above. In conjunction with proposed paragraph 8F(4)(c) stating that declarations cannot be varied or revoked once made, this may have potential to cause unfair outcomes if mistakes are made, and reinsurance claims that should, in fact, be eligible are legally rendered ineligible, and vice versa, though this has not been raised as a concern by stakeholders.

Stakeholder views

Stakeholders were particularly concerned with the strict, externally regulated 48-hour window after the end of a cyclone within which claimable damage must occur, noting that it would:

• require a significant change to current insurance business practices and increase the obstacles to a smooth renegotiation of existing reinsurance contracts, as well as being difficult to enforce[182] and
• exclude potentially very significant damage before a severe storm is first upgraded to a named cyclone and in the days after it is downgraded, of particular relevance for cyclone-related flooding.[183]

The RACQ described the ‘claims period’ as defined in the Bill as ‘the main cause of the pool’s complexity and uncertainty’.[184] In its evidence to the Senate Economics Committee, the RACQ explained that standard practice in the reinsurance industry is for reinsurance contracts to cover a 168 hour or one week period whose specific timing is determined by the insurer, to ensure coverage of the largest possible number of claims.[185] The RACQ warned:

By allowing the BoM, via the ARPC, to make the start and end date determination, it is made purely on meteorological terms and the choice of date of loss is taken away from the insurer. The claims period, as it is defined, is not an approach adopted by the global market and so its alignment with typical reinsurance treaties is yet to be properly tested. Any cover uncertainty or duplication will impact on member benefits.[186]

The RACQ also presented evidence that a large quantum of damage from cyclone events would likely be ineligible for ARPC reinsurance under this rule:

RACQ recently completed an analysis of Australia’s history of cyclones over the past 40 years. During that time, the Bureau of Meteorology declared 226 tropical cyclones that approached or crossed Australia’s coastline. When applying the claims period over the cyclones’ timelines and trajectories, we have determined that almost 50 per cent or 112 of these cyclones would experience a gap in pool coverage before or after the defined claims period. Some of these cyclones may not have been covered at all. … Cyclone Oswald … was only a category one cyclone in 2013. However, it was a slow-moving system that brought incredible storm-related damage costing approximately $100 million in damage and loss to RACQ member property and possessions, in today’s terms. … Because ex-TC Oswald caused most of its damage after the 48-hour period down Queensland’s coastline, the pool would have covered virtually none of RACQ members’ losses. … A “pre-cyclone” system could cause significant flooding or storm surge. … A homeowner who is impacted by a system either shortly before a cyclone is declared, or after a cyclone is downgraded, is unlikely to appreciate such nuances and semantics and is likely to expect the pool to respond to their situation.[187]

Though not discussed by the RACQ, current climate modelling projects that cyclones may become more slow-moving as climate change progresses (see page 11 of Digest).[188] If this projection is realised, this rule may see an increasing problem of ‘under-reinsurance’ for cyclone-related damage occurring before or after the cyclonic phase of slow-moving severe storm systems.

Source: RACQ, Submission to the Senate Economic Legislation Committee, Inquiry into the Treasury Laws Amendment (Cyclone and Flood Damage Reinsurance Pool) Bill 2022, March 2022, 6.

Commonwealth guarantee for payments under cyclone reinsurance contracts

Item 19 of the Bill introduces proposed section 35A, which provides that the Commonwealth guarantees the ARPC’s cyclone reinsurance contract liabilities, up to a limit of $10 billion per financial year unless the Minister authorises a higher amount by notifiable instrument. The ARPC must notify the Minister if it considers it likely that $10 billion will not be sufficient, in which case the Minister must consult with the Treasurer (if the Minister is not the Treasurer), Prime Minister and Finance Minister to determine what amount will be sufficient.[189]

Ministerial determinations cannot be revoked and a unilateral determination made by the Minister will be valid even if the Minister has not consulted with the Treasurer, Prime Minister and Finance Minister.[190] This raises concerns that decisions with potentially very significant fiscal impacts will be left to ministerial discretion without oversight by either the Parliament or senior members of the Executive.

Other provisions

Changes to ARPC governance arrangements

Items 12 to 15 propose more robust governance requirements for the ARPC, commensurate with the significantly expanded role envisaged by the Bill. Historically, the ARPC has only been called on once to fulfill its reinsurance contracts in the case of terrorist acts (following the Lindt café siege). Cyclones, by contrast, are expected to continue to be regular occurrences in northern Australia, and the Bill will require additional actuarial oversight of the ARPC and other governance enhancements to enable it to administer the cyclone reinsurance pool.

Item 14 introduces a new power for the Minister to appoint a representative of APRA and a representative of the Australian Government Actuary (AGA) as part-time observers (though the Minister can choose to appoint only one observer) provided the Minister is satisfied they have the relevant qualifications or experience.[191] Observers may attend meetings, take part in proceedings and report back to the Minister but cannot vote on matters.[192] Observers can be appointed for a period of up to 2 years and the Minister may terminate the appointment of an observer at any time.[193]

Item 15 inserts a requirement for the ARPC to nominate a ‘reviewing actuary’ who is a Fellow of the Institute of Actuaries of Australia.[194] The reviewing actuary cannot be an employee or a consultant engaged by the ARPC.[195] For the first 3 years of the scheme, the ARPC must nominate the AGA as the inaugural reviewing actuary.[196] The reviewing actuary’s role will be to review premiums set by the ARPC in the context of the requirements set out in proposed section 8D, review ARPC Financial Outlook Reports and provide advice on actuarial matters as requested by the ARPC.[197] The reviewing actuary must notify the ARPC of any significant concerns about the scheme’s financial sustainability or the ARPC’s risk management processes.[198]

Item 26 inserts proposed section 40A which requires the ARPC to deliver a Financial Outlook Report to the Minister at the end of each financial year, covering matters to be set out in the regulations.[199] The report must also be published online within 10 days of delivery to the Minister.[200]

Item 26 also repeals and replaces section 41 to amend the current requirements for reviewing the operation of the Terrorism Insurance Act. Proposed section 41 will require the Minister to review the future operation of the amended Act in mid-2025 and every 5 years thereafter. However, the Government has committed to an earlier ministerial review 12 months after commencement, and this has been supported by stakeholders.[201]

Application provisions

Part 2 of the Bill (comprising items 27 to 30) clarifies when and how aspects of the amendments will apply. The most substantive item is item 27, which states that small insurers (with total gross written premiums of less than $300 million) that are required to participate in the scheme must be subscribed by the start of the 2025 calendar year, and large insurers must be subscribed by the start of the 2024 calendar year.

Concluding comments

The Bill gives effect to the Government’s commitment to establish a reinsurance pool for damages arising from cyclones and related flooding, to address long-standing concerns about high insurance premiums in northern Australia.

There is broad support for the reinsurance scheme in principle, however many stakeholders have expressed uncertainty as to whether the scheme can achieve the premium savings projected by the Government, and raised concerns about key operational details. Other stakeholders have raised overarching concerns about the scheme’s scope and fairness, and the right balance between providing immediate premium relief and encouraging actual risk reduction.

These factors make it likely that stakeholders will sustain pressure on the Government to make further amendments in the coming months and years; in particular, to expand the reinsurance scheme beyond its current remit to address equity concerns in the context of increasingly widespread natural disasters due to climate change.