Chapter 5
The committee's view and recommendations
5.1
This chapter presents the committee's view and recommendations on the
key issues raised in this report:
- the need to improve transparency in the states and territories' reporting
of their insurance and reinsurance arrangements;
- the need for the Commonwealth Grants Commission (CGC) to be more
thorough in its collection of the states' and territories' natural disaster
expenses to include insurance receipts;
- the claim that the current Natural Disaster Relief and Recovery
Arrangements (NDRRA) act as a disincentive for the states and territories to
adequately insure and reinsure their assets, with particular reference to
Queensland's case; and
- the meaning of the term 'cost-effective' in assessing the
adequacy of the states' and territories' insurance arrangements.
Improving transparency and consistency in insurance arrangements
5.2
Chapter 2 sketched the states' and territories' current insurance and
reinsurance arrangements. It noted significant gaps in the public reporting of
this data. At present, the states' captive insurance arrangements are reported
in an ad hoc fashion. The reporting of reinsurance arrangements is similarly
inadequate. The committee believes there is a need for standardised and
transparent reporting of the states' and territories' insurance arrangements.
Recommendation 1
5.3 The committee recommends that the Commonwealth Government consult with state
and territory governments to ensure that the states' and territories' captive
insurance and reinsurance arrangements are reported transparently and on a
comparable basis.
The Commonwealth Grants Commission and the 'all state average'
5.4
Chapters 3 and 4 noted that the CGC is currently seeking a clearer
picture of which states are insured and whether they have included past
insurance receipts in the data they provided to the Commission in the past. The
committee is surprised that this information is not routinely passed to the
CGC. Clearly, a state that pays reinsurance premiums should have this cost
factored in to the expenses that the CGC takes into account in determining its
gross state expenses data.
5.5
The committee encourages the CGC to ensure that all states and
territories do incorporate their reinsurance policy costs in the expenses data
provided to the CGC. This reaffirms the committee's emphasis in chapter 2 of
this report that the states need to be more transparent in reporting their
insurance arrangements.
Recommendation 2
5.6 The committee recommends that the Commonwealth Grants Commission ensures
that as part of the current redesign of its data request, state and territory
governments are required to include their past insurance and reinsurance
receipts for natural disaster insurance premiums. These data must be taken into
account by the Commission in determining the states' GST share.
The moral hazard problem
5.7
The committee recognises that under previous NDRRA Determinations, there
was the opportunity for state and territory governments to overly rely on
Commonwealth disaster relief payments to fund the rebuild of state
infrastructure. This assistance could act as a disincentive for governments to
have adequate capital or insurance to fund the replacement and restoration of
infrastructure.
5.8
The committee concurs with Commonwealth Treasury that the NDRRA should
not encourage the states and territories to under-insure their assets. Rather,
the purpose of the NDRRA is—and should remain—to supplement the states' and territories'
insurance policies. The objective of the states' captive insurers should be to
protect the state's balance sheet with regard to losses incurred as a result of
disasters. Reinsurance should support these arrangements.
5.9
In this context, it is proper that the states' insurance policies should
be subject to an independent review. The committee welcomes the Commonwealth
government's decision to amend the NDRRA to ensure that the state and territory
governments have adequate insurance arrangements in place (see chapter 3). It
is important that where a state has its arrangements reviewed and fails to meet
a certain standard, the Commonwealth can dock the level of financial assistance
to that state under the NDRRA.
5.10
The committee also supports the broader review of insurance arrangements
headed by Mr Trowbridge into matters including the Commonwealth's role in
providing disaster insurance or reinsurance to the private sector.
The case of Queensland
5.11
It is not clear to the committee that the Queensland government's
failure to secure a reinsurance policy for its assets was an example of the
'moral hazard' problem. There does seem to be merit to the claim by the Queensland
Government and the Commonwealth Treasury that Queensland's risk profile is
different to that of other states. Not only is there a higher incidence of
flood and cyclone events than in other states, but its population and state
assets are also more dispersed and its road network more extensive.
5.12
The committee notes the Queensland Government's claim that its 2004
reinsurance quote from the international insurance market did not represent
value for money. The premium was $6.4 million for $500 million of coverage with
an excess of $20 million.
5.13
In this context, the committee is particularly interested in what the
international market can offer the Queensland Government for the reinsurance of
its assets (see recommendation 3). It is concerned that the QGIF does not have
a reinsurance policy and has only returned to seek a quote from the
international insurance market in the wake of the recent floods and cyclones
and the federal government's announcements. It is important that there is
independent scrutiny of the quote that the Queensland government receives from
the market. This will allay concerns that Queensland is relying on NDRRA
payments in preference to purchasing adequate insurance.
Roads
5.14
It has been claimed that the Queensland Government was offered natural
disaster insurance including roads for $50 million a year. The Queensland Government
has denied that it was offered a deal on these terms and there has been no
evidence provided from a third party suggesting the Queensland Government was
offered a contract on these terms. The committee notes the Queensland Government's
claim that in 2004 it could not secure a reinsurance policy for its extensive
road network. It is also aware that Queensland is not alone among Australian
states in not having a reinsurance policy for its roads.
5.15
The committee believes that the current Natural Disasters Insurance
Review, headed by Mr Trowbridge, should specifically examine the ability of the
international insurance market to offer adequate and affordable cover for the states'
and territories' road networks. Again, the committee is particularly interested
to learn the outcome of the Queensland Government's current approach to the global
market to reinsure its road network.
Recommendation 3
5.16 The committee recommends that a particular focus of the Natural
Disasters Insurance Review into the adequacy of current insurance arrangements
should be on whether the international insurance market offers reinsurance for
the states' and territories' road networks.
The meaning of 'cost effective'
5.17
The terms of reference for this inquiry direct the committee to consider
'the appropriateness of fiscal arrangements for natural disaster reconstruction
efforts'. The committee supports the 2011 NDRRA Determination's emphasis on the
states having insurance arrangements that are 'cost effective for both the
state and the Commonwealth'.[1]
This principle of 'cost-effectiveness' does need to be defined, however.
5.18
The committee understands that the Commonwealth Treasury has had
preliminary discussions with the Queensland Government on the meaning of the term
as it relates to state governments' insurance arrangements.[2]
Treasury must clarify its interpretation of what is a 'cost-effective'
insurance policy and this meaning must be understood and used by all states and
territories. This common basis for measurement should be based on an assessment
of a state's risk exposure, the geographic spread of its assets, the level of
insurance cover it seeks, the excess payable and the premium offered.
Recommendation 4
5.19 The committee recommends that the Commonwealth Treasury clarify what is
meant by the term 'cost-effective' as it relates to the 2011 NDRRA
Determination and the scrutiny of the states' and territories' insurance
arrangements.
Senator David Bushby
Chair
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