Introduction
2.1
This chapter examines stakeholder views on the provisions of the Treasury Laws Amendment (Cyclone and Flood Management Reinsurance Pool) Bill 2022 (the bill). It is based on the bills' explanatory materials and submissions received by this inquiry, as well as a public hearing in Canberra on 8 March 2022, and additional material submitted to the Senate Economics Legislation Committee (the committee).
2.2
This chapter provides an indicative, although not exhaustive, account of the key issues relating to the bill and concludes with the committee's views and recommendations on the bill. The discussion is separated into the key high-level reforms in relation to the scope and design of the bill as well as discussion of the review process to be undertaken upon the bill's implementation.
Overall support for the bills
2.3
Most submissions to the inquiry supported the bill and its intent to establish a cyclone reinsurance pool to improve insurance access and affordability for households and small business in cyclone-prone areas of Australia.
2.4
Many submitters commented that the bill has the potential to build the financial capacity of affected households and small businesses to recover from natural disasters and support the economic growth and resilience of cyclone prone areas. Stakeholders also noted the likely positive impact a pool will have in terms of increasing competition in the northern Australian insurance market and the overall effects that higher levels of insurance coverage will have in affected areas of northern Australia.
2.5
The Townsville Chamber of Commerce (TCC) and Regional Development Australia Townsville and North West Queensland (RDA) both expressed strong support for the bill objective to improve access and affordability to insurance in northern Australia:
RDA and the Townsville Chamber of Commerce would like to commend the introduction of the bill to create a reinsurance pool for cyclone and flood related damage. As the first of the four recommendations made in January 2021, we see this as a positive start to a more affordable and obtainable insurance market in northern Australia.
RDA and the Townsville Chamber of Commerce must also commend the Government and its commitment to implementing the reinsurance pool from 1 July 2022 because access to affordable insurance is vital to the economic prosperity and resilience of Australians who live and work in northern Australia.
2.6
Similarly, the Strata Community Association (SCA) emphasised the importance of the reinsurance pool starting as planned on 1 July 2022, stating 'the Senate should pass [the bill] in its current form as it is a critical first step in the process of reforming the insurance model for northern Australia'. In its submission, the SCA stated:
The introduction of the proposed reinsurance pool into legislation has the potential to have a substantial impact on offsetting the cost of insurance at risk strata properties in Northern Australia… Whilst the weather cannot be controlled, policies such as the reinsurance pool can ameliorate the cost of protecting against potentially disastrous events and improve overall consumer outcomes for hundreds of thousands of Australians.
2.7
Articulating the position of Sure Insurance, Mr Bradley Heath, the associations managing director, expressed strong support for the bill noting it 'will have enormous benefits for regional Queensland'.
2.8
This view was also shared by Mr John Devaney, a senior insurance broker in north Queensland, who submitted 'the proposed northern Australian insurance pool, as devised, has the potential to make a significant improvement to the cost of property insurance in Northern Australia'.
2.9
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) was also supportive of the reforms. Noting the bills alignment with recommendations made in its December 2020 Insurance Inquiry Report, the ASBFEO stated:
The intent of the Bill to ensure insurance cover for small businesses affected by cyclones and related flood damage is an important step to address the existing affordability and availability crisis in commercial property insurance. The measure is consistent with recommendations from this Office’s December 2020 Insurance Inquiry, and we are supportive of the Bill progressing.
2.10
Noting a constructive consultation process on the bill, and it's active participation therein, the Royal Automobile Club of Queensland (RACQ) also expressed support for a mandatory cyclone reinsurance pool to help achieve the objective of improving insurance accessibility and affordability in cyclone prone areas:
RACQ supports a Cyclone Reinsurance Pool. We have reinforced that support through four successive submissions to Government, and now the Senate, as well as numerous public comments in the media and to our members directly. We believe a pool can help curb the rising cost of insurance and make a difference to the lives of 1.3 million people who call northern Australia home.
Reservations about the bill
2.11
While supporting the intent of the bill, several inquiry participants raised concerns in relation to the scope and design of the cyclone reinsurance pool. The key concerns are discussed below.
Geographical scope of the reinsurance pool
2.12
Some submitters recommended that the reinsurance pool should be expanded to include the whole of Australia within its scope to improve the issue of unaffordable insurance across other parts of the country as well as in northern Australia.
2.13
For example, the Northern Territory Chamber of Commerce (NTCC) argued that 'the remit of the bill is potentially not broad enough' and that without expanding the pool's coverage nationwide, predicted savings from the pool in relation to insurance premiums should be viewed as optimistic.
2.14
Dr Antonia Settle, Postdoctoral Fellow at the University of Melbourne, was also concerned about the scope of the scheme. In her verbal evidence to the committee, Dr Settle stated:
… I want to draw attention to the fact that the unaffordability of insurance has rapidly become a national problem… I think we need a national policy that confronts this problem and manages a market shake-up in an orderly way. By addressing the insurance crisis through the provision of a blanket subsidy to the insurance market, the insurance pool clearly fails to do this… it needs to be much forward looking, with an eye to growing geographical segregation between socio-economic groups.
2.15
By contrast, RACQ submitted that reinsurance costs are significantly higher in north Queensland:
RACQ pays proportionately more for reinsurance in north Queensland with a "rate online" (ratio of reinsurance premium paid to maximum loss recoverable) nearly three times greater than south east Queensland.
Cyclone drives this higher rate due to past claims history and catastrophe models that point to increased risk. RACQ's current catastrophe program costs $125 million. Eight of RACQ's 15 costliest weather events in the past decade have occurred in north Queensland.
2.16
Ms Tracy Green from RACQ acknowledged the issue of insurance accessibility and affordability across Australia. However, she pointed out that the objective of the bill was to address insurance affordability in cyclone-prone areas.
When we have a look more broadly, accessibility and affordability of insurance are going to be important as Australia is exposed to a number of perils around cyclone, bushfires and flood… We do, however, recognise that the government objective in terms of this pool is improving the accessibility and affordability of insurance for cyclone-prone areas. We recognise that there is a limit around the policy objective which the government is trying to address right now.
2.17
Commenting on the extremity and frequency of severe weather in northern Australia, several submitters highlighted the appropriate scope of the pool. For example, the Business Council of Co-operatives and Mutuals (BCCM) stated:
Northern Australia is a region prone to extreme weather events. The risks associated with living and operating small and medium businesses in northern Australia require an effective and affordable insurance and risk protection market. The BCCM welcomes the objectives of the Bill to make more affordable cover available to market participants.
2.18
Woodside Energy Ltd also agreed with the need for a targeted measure 'to improve insurance access and affordability for households and small business in cyclone-prone areas', noting the impacts that unaffordability and under and non-insurance has on Australian communities and the economy at large:
… as insurance for households and small businesses caused by extreme weather becomes less accessible and / or affordable additional financial pressure is placed on communities and governments who are left to cover the clean-up. This is particularly topical given the strength and intensity of recent cyclones to impact Karratha and surrounding areas, including Cyclone Veronica in 2019 and Cyclone Damien in 2020. Both cyclones subjected Karratha to heavy rainfall, flooding and storm force winds, which caused damage to homes and businesses, and impacted resource and agricultural operations.
2.19
Providing a backdrop of the severity of this issue in cyclone-prone areas in northern Australia, the committee also received evidence from the Australian Competition and Consumer Commission (ACCC) outlining the estimates of non-insurance and insurance premiums in northern Australia from data it collated over recent years:
Rates of non-insurance for homes appears to be significant and growing in some parts of northern Australia. Using 2016 Census data, we estimated the rate of home non-insurance in northern Australia to be around 20%. This means around 86,000 properties were without home building insurance in 2016. This is generally higher than our estimate of the rate of non-insurance for the rest of Australia, which was around 11%.
At a regional level, North-Western Australia's estimated rate of non-insurance was the highest at 40% (around 10,700 properties), followed by the Northern Territory at 26% (around 13,200 properties) and north Queensland at 17% (around 62,100 properties).
We also found the level of home non-insurance varied significantly between postcodes within regions, with 'average' figures disguising pockets of deeper non-insurance.
Over 95% of respondents to our survey of northern Australian residents without home insurance attributed this to cost (52% said they couldn't afford it and 45% couldn't justify the cost). Cost was also the main reason for not getting contents insurance.
2.20
Further, in relation to the significantly higher exposure to risk and associated cost of insurance premiums in northern Australia compared to the rest of the country, Mr Mathew Jones and Ms Aparna Reddy from the Insurance Council Australia (ICA) stated:
Mr Jones: … We know that around 67 per cent of policy holders in Far North Queensland are exposed to cyclone and flood risk compared to around 17 per cent in non-Far North Queensland areas. That's according to the ACCC's inquiry into that area.
Senator McDONALD: Why are premiums six times greater for a property in Townsville than Brisbane? Would you say there's six times the risk?
Ms Reddy: There are a range of reasons. They do relate to greater levels of risk but also higher claims costs as well. The claims frequency is highly volatile, and there are major fluctuations in cost to insurers. As those who appeared prior also noted, there are inflationary pressures around that. The average claims cost in northern Queensland is around $7,300, compared to around $6,000 in northern Western Australia and around $3,500 in the Northern Territory. In the rest of Australia, the average is around $6,500.
Design of the reinsurance pool
2.21
Several submitters raised concerns regarding the design of the proposed cyclone reinsurance pool. Stakeholders argued that if the bill is enacted in its present form, it would fail to meet the policy intent of encouraging greater insurance participation and coverage in cyclone-prone areas. The basis of this argument being that the pool should be expanded in certain ways to maximise the opportunity for participation and coverage within the scheme.
Increasing insurer participation in northern Australia
2.22
As outlined above, submitters raised concerns that a reinsurance pool would not increase competition or encourage insurers to re-enter the northern Australian insurance market.
2.23
For example, the National Insurance Brokers Association (NIBA) suggested that this policy objective will not be achieved by the pool as it does not provide an incentive for insurers who have already exited the market to return:
Currently the legislation requires general insurers who undertake liability, under pool insurance contracts, in respect of eligible cyclone losses to maintain contracts of reinsurance with the Australian Reinsurance Pool Corporation (ARPC).
Based on the current wording of the bill, general insurers who write cover for other types of risks in northern Australia but do not write cyclone risk, or who have ceased writing such risks by the date they are required to join the pool, are not required to participate.
NIBA notes that there is nothing preventing these insurers from gradually declining to renew existing cyclone exposed risks until eventually they are no longer required to participate.
Furthermore, insurers may refuse to provide cover to properties that are not eligible for the reinsurance pool further exacerbating issues raised by NIBA… In NIBA’s view this directly contradicts the pool’s aim to increase insurer participation and competition in the northern Australian market.
2.24
However, the SCA disagreed with this perspective, arguing that the reinsurance pool would increase competition by encouraging greater insurer participation in cyclone-prone areas:
It is the expectation of SCA that introducing the reinsurance pool will encourage insurance companies to re-enter the market, increasing competition and driving down insurance costs to override the existing market failure. Whilst the weather cannot be controlled, policies such as the reinsurance pool can ameliorate the cost of protecting against potentially disastrous events and improve overall consumer outcomes for hundreds of thousands of Australians.
2.25
Ms Mohita Zaheed from the Department of the Treasury (Treasury) advised that the pool is designed to increase insurer participation and competition in the northern Australian market by facilitating entry into the market:
I am aware that not all insurers operate in all regions of Australia. There are some insurers who won't underwrite risks in particular areas. The government generally does not dictate which areas insurers cover. It is a private market. One of the reasons for doing the pool and one of the objectives of the pool is it should make it easier for insurers to be able to enter the market in northern Australia, because they will have access to a reinsurance rate that takes the risk out of the system for them enough to go back into the market. Part of the design of the pool is to encourage insurers to either start writing up north, if they haven't been in the past, or potentially re-enter the market if they have withdrawn because of prohibitive rates…
Related damage period
2.26
Proposed subsections 8F(2) and (3) of the Act stipulate that the instrument declaring the end of a cyclone event will provide that the claims period for the reinsurance pool ceases at a fixed time of 48 hours after a cyclone formally ends (the related damage period). This additional timeframe recognises that significant property damage from wind and flooding can still occur after a cyclone has been downgraded to a rain-bearing depression. To ensure a degree of flexibility in the scheme, the duration of the related damage period is prescribed in the regulations. It also allows for the suitability of the duration of the related damage period to be reviewed and for future changes to be made in a timely manner if necessary.
Duration of the related damage period
2.27
Several submitters recommended that the proposed related damage period should be extended to 168 hours (seven days) to provide greater protection for consumers as the full effect of floods caused by tropical cyclones may not be experienced within 48 hours.
2.28
The Insurance Council of Australia (ICA) submitted:
Insurance Council members request consideration of a wider time period in relation to cyclone-related flooding. Cyclone related flooding has a greater impact on affordability than cyclone. While we appreciate the Government’s intention to confine the Pool coverage to floods occurring within 48 hours, it may do little to address affordability for those facing affordability challenges. Consideration should be given to the Pool covering claims for cyclone and related flood damage arising during a cyclone event up to 7 days after the cyclone ends.
2.29
RACQ also suggested that the related damage period be lengthened, outlining alternative options for the committee’s consideration:
The definition of the claims period should be changed to align with standard reinsurance treaties and apply a "168 hours clause" (seven days). However, the seven-day period must overlap with a point in time when the weather event was a declared cyclone to meet the Government’s policy objectives.
…
If a shorter claims period must remain, the "48-hour rule" should be adjusted to bring the end of the claims period to 11.59pm on the day in which 48 hours have passed since the cyclone was downgraded. For example, if a cyclone is downgraded at 3.30pm on 1 January, the claims period should effectively end at 11.59pm on 3 January.
2.30
This view was shared by several stakeholders including the NIBA, NTCC, ASBEFO, Council of Small Business Organisations Australia (COSBOA) and the North Queensland Regional Organisation of Councils (NQROC). These organisations argued that related damage can occur several days after a cyclone is declared to have ended. The submitters also recommended that the design of the pool is revised to account for flooding as a result of an ex-cyclone or tropical low. The NQROC stated:
In our opinion… a claim period of 48 hours is inadequately short… For example, the Herbert River and the Burdekin River catchments cover 132,330 km, or about 7.6% of Queensland. In catchments this size, it takes several days for the full effect of cyclone-related floods to be felt.
It would be unfair for communities affected by TC [tropical cyclone] related floods to miss out on the benefits of this legislation, simply because they live in a large catchment where flood waters take more than 40 hours to reach them.
For North Queensland, a 48-hour claim caveat is inadequate and needs to be extended.
2.31
However, Mr Shandiman, Chairperson of the NAIL disagreed with this perspective, pointing out that the proposed 48-hour damage period would not have an impact on consumers' ability to make claims for related damage under the pool:
Without getting into the technicalities of it, I don't think it matters because, effectively, it's the insurer, not the client, who is able to make the claim after the period of 48 hours. The client, in their policy, does not have the 48-hour limitation; that is a limitation put on the insurer. I'm not sure whether that will or won't impact consumers directly—more broadly, possibly just insurers and how they make claims against a reinsurance pool.
2.32
Further, in response to suggestions that the prescribed related damage period is extended, Treasury noted that the 48-hour period would not necessarily exempt certain consumers from the pool’s coverage. Treasury explained that the importance of striking an appropriate balance between what is and is not covered by the scheme and the objective of improving access to insurance were acknowledged in the consultation and design process of the proposed pool.
We got a range of feedback. The 48-hours clause is something we looked into very carefully, and we got a range of feedback during the consultation process. There are a range of industry practices. With respect to the hours you mentioned from the RACQ, it's not the first time we've heard that. There are a couple of things I would point out. The reinsurance pool covers damages that result in the 48 hours after a cyclone has been downgraded. There's obviously a reinstatement clause that's been built into it. Because the pool covers cyclone and related flooding, it does not mean policy holders would fall out of coverage. What that means is that, with reinsurance contracts that the insurers have, they would need to make sure that the other reinsurance contracts that they have in place adequately cover cyclone related flooding after a 48-hour period.
One of the things we heard from different stakeholders was that it was important that the pool had a very clear demarcation in terms of what was covered and what was not covered. Based on that and based on advice and on feedback, the government has landed on the 48 hours, which seeks to strike that appropriate balance. I might throw to my colleague Mr Hunter to add to that point.
Mr Hunter: The only additional point I would make is that the pool covers damage that occurs from when a cyclone is named and identified by the Bureau of Meteorology, all the way through until the cyclone is downgraded—again, as observed by the Bureau of Meteorology—and the 48-hour period after the downgrade of the cyclone. So coverage is beyond just the 48 hours.
Policy coverage
2.33
A number of stakeholders recommended that the policy coverage of the reinsurance pool be amended to
increase the maximum sum insured threshold; and
include, for example, discretionary risk mutuals, farm businesses, insurance contracts providing specialised commercial marine cover, and motor vehicle insurance within the ambit of the scheme.
Maximum sum insured test
2.34
The proposed maximum sum insured test (the test) within the reinsurance pool applies so that a policy is only covered under the scheme if the sum insured for eligible risks covered by the pool does not exceed the prescribed threshold. The threshold amount for the test is prescribed by regulations and does not apply to eligible household property policies. Whilst there was not overwhelming criticism for this element of the pools design, some stakeholders were concerned that the test would have a consequential impact on businesses and may add to the issue of access and affordability to insurance in northern Australia.
2.35
The ASBFEO submitted that a threshold of five million dollars would be insufficient to meet the needs of many small businesses and may lead to an increase in underinsurance throughout the sector.
2.36
This view was shared Mr Devaney who also suggested that the threshold should be increased so that any business with a commercial property sum insured greater than $10 million could be eligible for participation in the scheme.
2.37
Further, in relation to the inclusion of commercial property facilities such as aged care (and other care) facilities, the NIBA recommended that the definition of residential properties 'be expanded to include aged care and residential care properties' under the legislation. NIBA submitted:
Under the legislation, aged care (and other care) facilities are considered commercial properties, despite the fact they are the primary place of residence for many elderly people and those with additional care needs. As a result of this classification, these properties are only eligible for inclusion in the reinsurance pool if they have a sum insured less than $5 million.
…Excluding these properties would likely increase the cost of care for residents. To address this issue, NIBA recommends that the definition of residential properties be expanded to include aged care and residential care properties thus removing the sum-insured value test.
2.38
The Port Douglas Apartments Committee (PDA) raised concerns about the exclusion of short-term accommodation from the reinsurance pool because of the test. PDA submitted that eligibility to enter the pool needed to be clarified within the legislation 'to ensure that short term accommodation strata insurance contracts have permanent, equitable access to insurance', as ‘those excluded from participation will be subject to even steeper increases in insurance premiums'.
2.39
NAIL stated that the maximum sum insured threshold for commercial and accommodation buildings is too low and may not cover enough consumers, and that the inclusion of accommodation buildings (impacting on tourism in northern Australian communities) and aged care and other care facilities within the scheme should be considered. That said, NAIL took a pragmatic approach to bill, stating:
We have three areas around the eligibility that we feel must be reviewed in the future. From our perspective, getting something passed now as a starting point is always better than having nothing passed at all.
2.40
Notwithstanding the above concerns, Treasury referred to its consultation process on the regulations containing the definition of 'maximum sum insured'. Mr James Hunter from Treasury noted that the consultation occurred between 3 and 17 December 2021, with feedback in the form of 54 submissions received. Mr Hunter also pointed out that 'in terms of the small-business percentage, the pool is expected to cover 96 per cent of small-business property policies in northern Australia'.
Discretionary risk mutuals
2.41
In their respective submissions, both Capricorn Mutual and the BCCM recommended expansion of the reinsurance pool to include mutuals. This suggestion was put forth on the basis that their exclusion from the bill would put members of mutuals at a disadvantage and compromise their competitiveness against insurance companies. Capricorn Mutual argued:
… the Bill does not currently recognise the risk protection provided to small businesses and households in cyclone-prone areas by mutuals such as Capricorn Mutual.
Capricorn Mutual does not have the ability to participate in the scheme, based on the current drafting of the Bill, and will be substantially prejudiced compared with the premiums able to be offered by participating insurers, including those insurers for which participation is not mandatory…
We respectfully submit that the inability of mutuals… to participate in the scheme and contribute to the reinsurance pool is an omission that it should be rectified in order to ensure the purpose of the Bill is achieved.
2.42
Noting its support of the policy objective underpinning the bill 'to deliver greater access and improved affordability of risk protection in northern Australia', the BCCM submitted that the exclusion of discretionary risk mutuals may have the following unintended consequences:
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.
This would be of detriment to both the current and potential members of mutuals and the wider community that would benefit from the business model competition that mutuals foster in markets.
2.43
However, in the context of getting the process of establishing a reinsurance pool started and undertaking appropriate reviews to amend the legislation where necessary, Ms Zaheed from Treasury noted that mutuals are a very different product, a reason why they have not been brought into the scheme.
Other exclusions
2.44
As mentioned above, various groups made recommendations that sectors such as insurance contracts providing cover to farm businesses and specialised marine cover, which are currently ineligible, as well as motor insurance policies be covered by the reinsurance pool.
2.45
Mr Devaney suggested that all non-residential farm buildings should be deemed small businesses and included within the scope of the scheme as it would be inequitable not to do so. In his submission, Mr Devaney argued that if such buildings were in an industrial estate, they would be eligible under the scheme.
2.46
The ASBFEO suggested the bill be amended to provide coverage under the pool for marine insurance contracts from the outset as 'boats, marinas and docks represent a significant investment for small businesses and have a unique level of exposure to cyclone and related flood damage'.
2.47
Finally, RACQ recommended the committee consider the inclusion of motor insurance within the bill to ensure efficiency and cost effectiveness. RACQ stated that although not a large proportion of cyclone-related losses are claimed, the inclusion of motor insurance would minimise friction costs by eliminating the need to split out this cyclone exposure to purchase from the market. Nonetheless, Mr Tracy Green from RACQ accepted the rationale for the exclusion of motor insurance from bill, that the premium pressure on motor vehicle insurance hasn't been in the same category as that with respect to home and contents insurance.
Other suggested solutions
2.48
Several stakeholders noted that the establishment of a cyclone reinsurance pool is only one element of solving the problem of accessibility and affordability of insurance in cyclone-affected areas of northern Australia. Mitigation activities and the removal of stamp duty were, among the solutions proposed.
2.49
For example, the NIBA stated that 'risk mitigation by policy holders and Government public infrastructure reforms are likely to be the most effective way to reduce premiums'.
2.50
This view was also shared by several stakeholders including the Real Estate Institute of Australia (REIA), SCA, ICA and RACQ whom stated the establishment of the reinsurance pool should be accompanied by other systematic approaches to effect lasting change to insurance affordability, accessibility and community resilience. These stakeholders agreed that a pool will need to be supported by initiatives such as mitigation and resilience, building codes and state taxation. Summarising this point, RACQ stated:
We reiterate the need for the pool to run in tandem with significant disaster mitigation to reduce risk over the long term... Tax reform on general insurance is also needed. We do not believe it is right that Queenslanders pay 19.9 per cent in stamp duty and GST on their home insurance.
…
Also broadly, building standards and building resilience in terms of the housing stock that already exists, land planning to make sure that we’re not continuing to build properties in high-risk areas that are significantly exposed, flood levies, flood mitigation programs and retrofitting of properties.
2.51
Notably, several stakeholders were concerned about stamp duty in northern Australia, stating that one solution to the insurance affordability crisis would be to abolish stamp duty on insurance or ensure that state revenue is invested into resilience standards and mitigation measures in cyclone-affected areas.
2.52
RACQ stated their concerns succinctly:
… we need to do something about the significant burden that taxes impose on insurance affordability. In our home state of Queensland, our members are paying 19.9 per cent of their insurance on stamp duty… Perversely, the more risk our members face on their properties, the more tax they pay. This needs to change, and a good start would be to remove stamp duty completely from insurance policies.
2.53
Sure Insurance expressed the same view, stating that alongside the need to invest money collected from stamp duty into resilience programs, high insurance premiums doubled with taxes on insurance are 'a bit of a slap in the face' for policy holders in northern Australia.
2.54
Articulating the ICA’s position, Mr Mathew Jones, the association’s General Manager of Public Affairs, stated:
Extreme weather risk in this country is getting worse, but there are actions we can take that can lessen the impact, and I trust that the images we've seen in the last few days from Lismore and other devastated communities have made plain that, in our view, governments must invest more in programs that make homes more resilient and protect communities through infrastructure, like levies and floodways. Governments at all levels must also improve resilience, standards and building codes, remove insurance stamp duties imposed at a state level and levies, as your last witness was saying, and make better land use planning decisions that factor in worsening extreme weather and its impacts.
2.55
Likewise, NAIL commented on the need for state governments to reinvest stamp duty into mitigation schemes to address high premium levels. It also mentioned the impact this state tax has on northern Australians’ and where they live:
If the state government took the view that they would reinvest that extra money that they're collecting from people in the north back into resilience programs and mitigation measures, that might be a fair outcome for people in northern Australia, where the claims are reducing and premiums are reducing, but that's not happening… We do believe that there needs to be more action from state government on stamp duty. If they're not willing to abolish it then they should find a way of redistributing it fairly.
2.56
With regard to the above-mentioned suggestions, the ICA importantly highlighted that the reinsurance pool will in addition, recognise mitigation measures. On this point, Ms Aparna Reddy from the ICA stated:
… in terms of the connection to the design of the reinsurance pool, there is going to be recognition of mitigation as part of the design of the pool. Over time, the pool is to offer discounts for policies to cover properties that have undertaken cyclone and flood mitigation. Additionally, the ARPC will be collecting data to help the government plan its response to natural disasters. It is a holistic approach that is really needed to address affordability and accessibility concerns for the households most in need.
2.57
Lastly, the SCA noted that the federal government’s $40 million Strata Title Resilience Program is an encouraging move by the federal government to reduce cyclone risks for residential strata properties in northern Australia.
Effectiveness of the scheme in reducing premiums
2.58
Some stakeholders sought more clarity on the scheme's modelling data because of concerns that the cyclone reinsurance pool would not realise price reductions for insurance premiums for consumers in northern Australia.
2.59
The Australia Institute was doubtful that the bill will resolve the issue of affordability and accessibility. It is concerned that the bill will not achieve the purported increased competition and associated savings for consumers in the northern Australian insurance market.
2.60
Sure Insurance was concerned that insurance premium prices may increase as a result of the introduction of a reinsurance pool due to cross-subsidisation.
2.61
The NTCC submitted that without viewing the pool’s modelling data, the predicted savings for insurance premiums should be viewed as optimistic.
2.62
Both the NIBA and Shopping Centre Council of Australia (SCCA) stated that without the release of pricing or reinsurance premium modelling data, insurers are unable to assess the impact of the pool on premiums. The NIBA also noted that it was unclear what pricing data had been gathered from within the industry to support the savings claims. The SCCA argued that the absence of such data indicated the scheme is unjustifiable.
2.63
However, the view that the reinsurance pool will not achieve the projected savings on insurance premiums, as well as concerns about the pool’s disclosure of modelling data was not universally shared by stakeholders.
2.64
For example, the SCA argued that although the modelling is undisclosed at this stage, a pool has the potential to make cost savings for consumers in northern Australia.
2.65
Likewise, Mr Shandiman from NAIL acknowledged the rationale for the undisclosed modelling data noting the potential for savings to be realised by the pool’s implementation, stating:
We don't need to see the confidential modelling from insurance companies or anything that anyone has put in; it's more about how the savings are being provided to policyholders. At the end of the day, if you achieve the outcome of getting the significant savings you're proposing, our consumers don't care what the modelling says. If we get the savings, it doesn't really matter how it's modelled.
2.66
The TCC emphasised the significant positive effects and potential for economic stimulus and growth that a reduction of insurance premiums would have in their region of northern Queensland:
… A reduction of $2000 per household premium is reported to mean a combined economic output increase of $222.3 million annually to the Townsville [local government area] LGA. It also represents the potential for growth, the equivalent of 949 full time equivalent jobs year on year.
2.67
In response to concerns that savings would not be realised by consumers as a result of the reinsurance pool, the ACCC advised the committee of the role it would play in monitoring and reporting the costs, prices and profits associated with the reinsurance pool, and how that flows through to relevant policies once the scheme is implemented.
2.68
Commenting on the ACCC's role in ensuring that price reductions are passed on in insurance premiums, the ICA stated:
As part of the establishment of the pool, the ACCC have been tasked with price monitoring. Insurers welcome the ACCC’s price-monitoring role, given their expertise and their understanding of this issue.
2.69
Treasury highlighted in its evidence to the committee the comprehensive consultation process it undertook to derive the proposed savings figures that are aimed at high and medium risk households:
…we've had a number of consultation processes. The government released a consultation paper back in May 2021… we've engaged extensively with industry. We've had advisory panel discussions that included stakeholders in northern Queensland, brokers up in northern Queensland, the Townsville Chamber of Commerce and a number of the stakeholders that provided submissions to this inquiry.
Parallel to this, we ran a process of trying to gather data. We engaged Trinity Consulting, an actuarial consulting body. We also utilised the government actuary, who provides a lot of the modelling capacity for the Australian government. We also got data confidentially from insurers. I think I've signed my life away on a few of those confidentiality deeds! We used that data. We also got some global reinsurance datasets. There's CAP modelling data that is used globally by insurers to model their premiums. We used all available data that we could get access to, through Finity [sic], our consulting partners, to model what the outcomes could be based on the design parameters that government was considering. That's where the figures come from.
Review of the scheme
2.70
Several submitters strongly articulated the importance of and supported a review of the reinsurance pool 12 months after its implementation.
2.71
The TCC submitted that a review a year after the pool's establishment will provide an opportunity to assess the scheme's effectiveness and make appropriate changes if necessary.
There has also been a commitment that there will be a Treasury review after 12 months and a formal review of the pool after 3 years. Such reviews will provide the opportunity to look at teething issues that may arise with the new framework and provide an avenue for amendments if the reinsurance pool is not providing an adequate reduction in premium prices and creating competition in the marketplace as is its intended purpose.
2.72
Similarly, COSBOA, the ICA and NAIL stated its support for the review process outlined in the draft legislation 'to monitor the effectiveness of the pool in the future'. Mr Shandiman from NAIL stated:
Mr Shandiman: … We can try to get this perfect in the first instance. We believe 'Let's get this through and let's deal with these issues in the future review.'
CHAIR: When this bill when comes before the Senate, hopefully towards the end of the month, what is your final message to the Senate of Australia?
Mr Shandiman: It would be to pass this legislation.
2.73
The ACCC advised the committee that the appropriate planning is in place to review the reinsurance pool 12 months after the pool’s establishment.
2.74
Treasury noted that the review would reflect any feedback received from stakeholders and would be an opportunity to assess the effectiveness of the scheme a within an appropriate timeframe and advise government of any necessary amendments to the scheme. Ms Zaheed from Treasury stated:
… It's a good early starting point to understand and get the early indicators of what's working, if there are issues that have come up in the early days of operations. That's an opportunity for us to look at the legislation and provide advice to government on what those resolutions may be.
Committee view
2.75
Insurance premiums in northern Australia are significantly more expensive due to the greater risk of extreme weather events including severe cyclones.
2.76
There was broad support amongst submitters and witnesses for the bill's proposed cyclone and flood reinsurance pool to improve insurance access and affordability for households and small businesses in cyclone-prone areas of Australia.
2.77
Given the numerous reviews and inquiries in recent years which support action being taken, the committee is firmly of the view that the establishment of the reinsurance pool is crucial in ensuring that Australians in cyclone-prone areas have access to affordable insurance. The cost of insurance for people living in Northern Australia – an economic powerhouse which benefits the whole of Australia – is not sustainable. Action must be taken.
2.78
While there was overall support for the bill, the committee notes the comments raised by inquiry participants in relation to the scope and design of the pool. It also notes that the pool is expected to reduce insurance premiums for eligible household, strata and small business policies. To that end, the committee considers that price monitoring undertaken by the ACCC will provide important transparency on how the benefits of the pool are being passed onto policyholders.
2.79
The committee recognises that the accompanying modelling for the bill has not been published and that this has raised concerns that insurance price reductions will not be realised. The committee acknowledges these concerns, however, is reassured that Treasury has engaged in an extensive consultation and design process with industry and has held advisory panel discussions with stakeholders in northern Queensland. The committee is persuaded by the evidence from Treasury that its comprehensive data analysis underpins the pool's design and will ensure that it delivers on its key objectives.
2.80
The committee notes that stakeholders endorsed the proposed 12-month review process as it will enable the effectiveness of the pool to be closely monitored and provide an opportunity to make any necessary and appropriate changes in a timely manner.
2.81
The committee further notes calls from submitters that the bill should be passed and that enhancements proposed by submitters should not slow down the passage of the bill, given it is crucial role in curbing the costs of growing insurance premiums in northern Australia. The committee strongly supports this perspective. The need to act now is vital. The 12 month and subsequent reviews provide an opportunity for adjustments to be made.
2.82
The committee is satisfied that the bill will deliver improved insurance access and affordability in cyclone-prone areas. This will build the financial capability of affected households and small businesses and enable them to recover from natural disasters. It will also support the economic resilience and development of affected areas in northern Australia. Furthermore, the committee expects the bill to increase competition by encouraging greater insurer participation in cyclone-prone areas and support high levels of insurance coverage by property owners. Recognising the broad view held by submitters that it is imperative the bill is passed as soon as possible with a review planned in the immediate future, the committee accordingly recommends that the bill be passed.
2.83
The committee recommends the bill be passed.
Liberal Senator for Queensland