Chapter 2
The Australian states' current
insurance and reinsurance arrangements
2.1
The terms of reference for this inquiry direct the committee to
examine—among other matters—the current insurance and reinsurance arrangements
of the states and territories of their assets and infrastructure. This chapter
considers these matters.
Captive insurance and reinsurance
2.2
All Australian states and territories have a captive insurer, which are
state agencies established with the specific objective of financing risks to
state government assets from public and products liability and special
industrial risks (including disasters). Covered agencies pay premiums to the captive
insurer, which then pays to replace public assets when needed.
2.3
Reinsurance is insurance that is purchased by an organisation to
transfer the risk of claims where its own balance sheet is unable to meet
potential claims. Reinsurance is therefore a risk sharing arrangement, whereby
the insurer obtains cover from a third party (the reinsurer) for part of the
credit risks that it has guaranteed, in exchange for the payment of a premium.
State governments' captive insurance and reinsurance arrangements
2.4
In the first instance, the committee notes the lack of transparency in
states' reinsurance arrangements. The committee has not received, nor has it found,
a publicly available list of the Australian states' and territories' reinsurance
arrangements. As this chapter attests, the state governments' websites and
annual reports are of varying quality. And, as subsequent chapters of this
report note, even the Commonwealth Grants Commission—which adjusts states' GST
share on the assumption that all states have the same spending policies in
regard to natural disaster relief[1]—seems
to be without a clear picture of these insurance costs.[2]
2.5
Most Australian state governments have reinsurance for their assets paid
through premiums to international insurance companies. Queensland appears to be
the only mainland state that does not have external reinsurance arrangements.[3]
2.6
Among the states that do have external reinsurance arrangements, the
level of cover varies. The committee is aware that Victoria has reinsurance for
its roads, for example.
Queensland
2.7
The Queensland Government Insurance Fund (QGIF) is the Queensland Government's
captive insurer. The QGIF commenced operation on 1 July 2001 and is a managed fund
within the general government sector. Agencies pay premiums to QGIF, claims are
met from it, and reserves are built up to meet the cost of insurable
liabilities.[4]
2.8
As mentioned, the Queensland Government does not purchase reinsurance
for QGIF on the global market. Instead, the state government is heavily reliant
on funding its natural disaster relief costs through arrangements with the
Commonwealth. The Queensland Government's website states that the purchase of
reinsurance as appropriate to the management of major and catastrophic risks 'is
an ongoing consideration'.[5]
2.9
The committee found it difficult to identify the QGIF's current
financial position. There is very little detail on the Fund's activities in Queensland
Treasury's Annual Reports or on the QGIF website.
2.10
The committee has seen a note sent from the Queensland Treasury to the
Queensland Treasurer on 21 January 2011. The note was obtained by The
Australian newspaper on 11 April 2011 under the State's Right to Information
Act 2009. It shows that the QGIF's premium revenue for 2010–2011 was $113
million, comprising health litigation ($57 million), general liability
(28.4 million) and property ($24.1 million). Queensland Treasury's 2009–10
Annual Report lists the QGIF's claims and concessions at $110 million.[6]
2.11
In his précis for the committee on the Queensland Government's
correspondence (see chapter 1), Mr Tsouroutis noted that as of 30 June 2010,
the QGIF had $685.5 million in outstanding insurance liabilities. In February
2011, the Queensland Treasurer stated that the Fund has more than $700 million
in reserves. Mr Tsouroutis concluded that:
In the absence of reinsurance, it appears that the QGIF had
negligible net reserves to meet any significant net claims such as those which
arose from the 2011 natural disasters, after allowing for its current fund
reserves which essentially only covered its current outstanding liabilities,
prior to the 2011 natural disasters.[7]
Victoria
2.12
The Victorian Government underwrites the state's exposures through its
captive insurer, the Victorian Managed Insurance Authority (VMIA). The VMIA's
insurance covers major government assets and infrastructure, the public
healthcare system and community service organisations. The Chief Executive
Officer of the VMIA, Mr Stephen Marshall, explained to the committee that the Authority's
objective is to protect its balance sheet and the state's balance sheet with
regard to losses incurred as a result of disasters.[8]
2.13
The VMIA's portfolio represents just over $108 billion in insured
assets, with annual premium revenue in 2009–2010 of nearly $175 million.[9]
The same financial year, the Authority paid an annual insurance premium of
$36.2 million, leaving net premium revenue of $138.8 million.[10]
Table 2.1:
Victorian Managed Insurance Authority's reinsurance
|
|
2010
($'000)
|
|
Premium revenue
|
$174,935
|
|
Outward reinsurance premium expense
|
$36,179
|
|
Net premium revenue
|
$138,756
|
Source: VMIA Annual Report 2010, p. 12.
2.14
The VMIA has a policy of purchasing reinsurance to limit the State's
financial exposure to recovery from natural disasters. In 2009–2010, this
included $1.45 billion for industrial special risks. The VMIA informed the
committee that in 2010–2011, the state has industrial special risk insurance
for $2.05 billion worth of assets within the state.[11]
The VMIA retains the first $50 million for each event and reinsures the
remainder in the local and overseas insurance markets.[12]
2.15
In addition to special industrial risks, the VMIA also has public and
products liability insurance which includes cover for the state's bridges and
roads. Again, the VMIA retains the first $50 million for each event and
reinsures a further $700 million on the local and overseas reinsurance markets.[13]
2.16
In evidence to the committee, Mr Marshall explained the process for
insuring the state's roads as follows:
VicRoads identify what the replacement value is per kilometre
of road, whether it be a single road, single lane, dual highway and the like.
VicRoads actually do have quite a robust asset replacement value—I think it is
in excess of $20 billion. As I mentioned before, we rely on their valuations in
regard to the kilometre of road depending on each of those constructions.[14]
2.17
The Victorian Government is reportedly in talks with the insurer Swiss
Re to expand its external insurance coverage. These discussions were initiated
by the state government in response to the Black Saturday bushfires.[15]
Mr Marshall told the committee that losses of state assets from the 2010
bushfires were 'somewhere between $50 million and $60 million', paid for by the
VMIA, 'with very marginal reinsurance recoveries'.[16]
South Australia
2.18
One of the roles of the South Australian Government Financing Authority
(SAFA) is as a captive insurer for the Government of South Australia. The
2009–2010 SAFA Annual Report states that although the South Australian
Government is fundamentally a self-insurer of most of its own risks, 'it has
been considered appropriate and desirable that the state's finances be
protected against the financial consequences of a catastrophic event'.[17]
The SAFA Annual Report notes that under the Catastrophic Reinsurance program,
the items in Table 2.2 are insured at the corresponding levels.
Table
2.2: South Australian Government's insurance and reinsurance 2009–2010
|
|
2009–10 ($m)
|
|
Premium revenue
|
35
|
|
Reinsurance expense
|
7
|
|
Net claims
|
10.3
|
Source: SAICORP Annual
Report 2009–10
New South Wales
2.19
The committee has not received information during this inquiry on the
insurance and reinsurance arrangements of New South Wales (NSW) Government
assets. It is aware that the state's captive insurer is the Treasury Managed
Fund (TMF), which provides a full range of insurance covers and services for
all participating Agencies.[18]
The TMF's website describes its overall purpose as 'to provide structure and
services that will assist Agencies in reducing the impact of risk exposures and
maximise resources available to support their core business'.[19]
The TMF is itself administered by the NSW Self Insurance Corporation (SICorp).
2.20
There is little information on the SICorp website about reinsurance
arrangements. It does note that the TMF is protected by 'a comprehensive reinsurance
program' and that the TMF has a reinsurance contract with Aon Benfield
(Australia) Limited from 1 October 2009 to 30 September 2013.[20]
Western Australia
2.21
The Western Australian Government's self insurer is the Riskcover Fund. The
Fund is underwritten by the Crown and is managed by the Insurance Commission of
Western Australia on behalf of the state government. As part of RiskCover's
commercial claims management service, a whole of State response is provided in
respect of Western Australian government risks, to catastrophic losses such as
cyclones, bush fires and floods.[21]
2.22
The Riskcover Fund's Statement of Comprehensive Income for the financial
year ending 30 June 2010 listed outward reinsurance premium expense at $14.1 million.[22]
Again, publicly available data on reinsurance arrangements is difficult to
find.
Tasmania
2.23
The Tasmanian Risk Management Fund is the Tasmanian Government's
self-insurance fund through which various agencies are covered for personal
injury, legal liability, property and travel. The Fund operates on a
cost-recovery basis with all participating agencies paying annual contributions
to meet claim costs up to $5 million, administrative expenses, and where
applicable, insurance premiums and reinsurance costs. The level of agencies' contributions
is determined by an independent actuary and reflects their risk exposure,
claims experience and nominated excess amounts.[23]
2.24
In setting agency contributions, the Fund aims to achieve: the
collection of sufficient moneys each year to fund claims costs and alleviate
the financial impact of large unexpected events; equity for user agencies with
minimal cross-subsidisation; stability in contributions over time; and
incentives for risk management, through recognition of claims experience. The
Fund's finances are managed through the Tasmanian State Service Risk Management
Account in the Special Deposits and Trust Fund.[24]
Concluding comment
2.25
The committee notes the lack of detailed, publicly available information
on the states' and territories' current insurance and reinsurance arrangements.
With the exception of Victoria, the collation and publication of this
information among the mainland state governments is particularly poor. Chapter
5 makes a recommendation to address this problem.
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