Chapter 3Issues raised about the operation and implementation of the pool
3.1Evidence to the inquiry indicated the two main concerns with the implementation of the Cyclone Reinsurance Pool (the pool, or CRP) were:
the timing of the release of the modelling by the Australian Reinsurance Pool Corporation (ARPC); and
whether the anticipated savings generated by the pool for policy holders will materialise.
3.2However, several other topics were raised by stakeholders to the committee in relation to the ongoing operation and implementation of the pool, namely:
further incentives to encourage insurers to provide coverage in Northern Australia (and join the pool);
the budget neutrality requirement;
the length of the 48-hour coverage period following the downgrading of a cyclone;
the inclusion of marine insurance;
the impact of climate change on the operation of the pool;
differences in insurance coverage across states and territories; and
concerns about the role of the Australian Competition and Consumer Commission (ACCC).
3.3This chapter outlines the above concerns raised by submitters and witnesses, and government responses to these concerns. The committee’s position on these issues and proposals for change are outlined in the final chapter.
Reasons why insurers have not yet joined the pool
3.4Reasons given for insurers not yet joining the pool included:
the timing of the release by the ARPC of the modelling that insurers needed to make decisions on premium costs and to implement administrative and system changes, in June 2022 just before the beginning of the 2022–23 financial year; and
the timing of the release of the Government’s finalised reinsurance premiums, in September 2022, because insurers typically renegotiate their reinsurance contracts three months in advance;
insurers already having reinsurance programs for 2022 in place before the pool began operations on 1 July 2022, because:
- some insurers have reinsurance arrangements in place per calendar year;
- some reinsurance arrangements are acquired across several years; and
the complexity of reinsurance arrangements, including the fact that reinsurance cover provided by the pool is the same as international reinsurance products on the private market, and the gaps between what is covered by the pool and what will need to be covered by the private market.
3.5Mrs Christa Marjoribanks, Executive General Manager of Insurance Australia Group (IAG), highlighted the challenges with ‘the speed at which this is developing: the rush in which we have to take what's quite complicated work, build that into our pricing, and then roll out those operational changes’.
3.6On the issue of complex insurance arrangements, Mr Trent Sayers from RACQ estimated that with the current structure of the pool, 30 per cent of RACQ’s losses would not be covered by the pool. This would mean RACQ will still need to source that cover in the external global reinsurance market.
3.7Mr Sayers also noted there were ‘a lot of systems and data work’ to get right to maximise consumer outcomes and avoid consumers being treated differently, depending on an insurer's approach to data collection.
3.8RACQ stated it ‘would have liked to be already offering meaningful premium reductions’ to its members through the pool. However, ‘policy decisions that imposed complexity and restrictions have held us back from joining from the start date… and have raised doubts as to whether the pool will achieve the Government’s objectives’.
3.9As noted in chapter two, as of early February 2023, two insurers—Allianz Australia and Sure Insurance — had joined the pool.
3.10Of the other major insurers who appeared at the November 2022 public hearing:
QBE stated its intent to be ‘progressively entering the pool’ throughout 2023;
RACQ stated that its reinsurance renewal is 1 July, so RACQ would join the pool ‘somewhere from that period forward’; and
IAG informed the committee that ‘it’s likely we won’t be entering until later’ in 2023.
3.11On 16 February 2023, at Senate Estimates, the ARPC advised that it expects two major insurers to commence cover through the pool by 1 July 2023 with the remaining six major insurers required to join the pool by 31 December 2023. Further, the pool now covers 19 per cent of home insurance sums in Northern Australia, covering 468 000 policies in Queensland, the Northern Territory and Western Australia.
3.12Allianz also announced in early March 2023 that its membership of the pool had allowed it to expand its home and landlord insurance coverage to 100 new postcodes in Northern Queensland and Western Australia.
Why did the ARPC not release the modelling until June 2022?
3.13On the timing of the release of the modelling, Dr Christopher Wallace from the ARPC informed the committee that although premium rates were not published until June 2022, insurers had access to earlier drafts:
We published the premium rates in full on 30 June. But I just wanted to note that insurers did actually have earlier drafts of these rates. The June rates were full, complete rates approved by our board. Our minister, Assistant Treasurer Jones, asked us to consider extending consultation on the premium rates further and he helped us by writing to insurers seeking further pricing information, which was very helpful. We received four times as much data. It was very significant.
In addition, because we had a bit more time, we actually were able to get some more input from international modelling firms, which helped us to also refine the modelling. The actual premium rates fell 10 per cent between our June and September rates in actual fact… Obviously, the savings reduced because we had almost a million records rather than 200000 records. So it just gave us more granular data.
3.14Mr Robb Preston, Assistant Secretary, Banking, Credit and Insurance Branch of the Department of the Treasury, explained the difference in modelling released in June 2022 with modelling released in September 2022, after insurers provided further data:
The June modelling was based on 200,000 home properties; there was a million in September. In the SME market there were 281 properties in the dataset and then it became 71,000 in September. So there was a radical change in the available information. That allowed greater understanding of underlying risks, and more accurate modelling.
Anticipated impact on premium costs
3.15When this inquiry took evidence, in late 2022, no insurers had joined the pool, meaning the pool had not yet impacted insurance coverage in Northern Australia or the cost of premiums. Since then, two insurers have signed up. However, the general view that the committee derived from submitters and witnesses was that it is still too early to determine whether the pool has led to anticipated reduced premium costs.
3.16In particular, the Insurance Council of Australia suggested that the ‘full effect’ of the pool on ‘pricing perhaps won’t take place until the end of [2023]’, pointing to the fact that insurance premiums are issued annually.
3.17This section looks at the various factors affecting premium costs, the anticipated impact of the pool on premium costs, community expectations about the premium reductions, and the question of sunsetting for new builds.
Factors affecting premium costs
3.18Allianz noted that the increased frequency of extreme weather events as well as cost inflation (for example, building materials) have led to increases in property premiums nationally. For policy holders with only a moderate cyclone risk with no related flooding risk, the impact of the pool ‘may only result in moderation of a premium increase, rather than a premium reduction’.
3.19In this regard, Allianz acknowledged that insurance premiums in northern Queensland may be particularly high if the property:
was built before 1982, when higher cyclone building standards were introduced;
is constructed of weatherboard rather than brick;
has had recent claims and is, for example, ineligible for no claims discounts;
is located on low lying land close to the coast and is thus also vulnerable to storm surge; and/or
is located on the side or top of a hill, where windshear can result in wind speeds nearly twice those impacting adjoining lower areas.
3.20Allianz suggested that affordable property insurance is dependent on other issues such as land use planning, building standards, development controls, mitigation and adaptation.
3.21Allianz also pointed out that the price increase for homes was on average 14 per cent across the industry in the third quarter of 2022, making it ‘difficult for an end-consumer to look at their bill from this year versus last year and see the savings consistent with the numbers that we're quoting’.
3.22This was echoed by the Insurance Council of Australia, which argued that any ‘projected average savings should be considered against an environment’ in which premiums are impacted by significant increases to the cost of claims, because of:
supply constraints;
building material price increases;
shortages of building trades; and
higher frequency and severity of extreme weather events over the last two years.
3.23Townsville Enterprise questioned whether the pool, even when insurers have signed up, will have a significant impact on policy premiums, particularly because of price inflation every year in Northern Australia.
3.24RACQ indicated in its submission that ‘information made available to RACQ does not seem to indicate widespread premium reductions’, with benefits to policyholders being ‘highly uncertain’ and ‘dependent on a number of factors including changes to the cost of non-pool reinsurance next year, the insurer's current pricing of cyclone risk and underlying claims inflation which is at a record high’.
3.25Relatedly, RACQ expressed concerns about whether the pool will lead to meaningful premium reductions in Northern Australia and contended that any benefits arising from the pool will be ‘more than offset by affordability pressures that are already pinching from building inflation, rising claims costs and growing climate impacts’.
3.26Mr Philip Kewin, the Chief Executive Officer of the National Insurance Brokers Association, also questioned whether the pool would lead to its expected outcomes:
The current trajectory of premiums suggests that any premium reductions in high-risk areas as a result of the reinsurance pool will not meet the previously promoted expectations of discounts and will only somewhat offset the substantial recent increases. Meanwhile, premiums in some perceived lower risk areas will continue to rise.
While brokers will continue to work hard to ensure their clients get the right cover at the most affordable price, our concern is that affordability will continue to be an issue, which may leave people with the feeling that the pool and, indeed, the broader insurance industry has let them down.
3.27Another factor affecting any premium reductions resulting from the pool is the gap that insurers need to manage between the cover provided by the pool and any additional cover that insurers need to source on the global reinsurance market.
3.28Mr Andrew Hall, the Chief Executive Officer and Executive Director of the Insurance Council of Australia, pointed to the gaps not covered by the pool, and the need for insurers to cover these gaps with private reinsurance:
…complicated treaties and agreements with the reinsurers need to roll off… There are gaps now that are not covered by the new scheme, so reinsurance in the private market will need to be sought to cover those gaps. When [insurers giving evidence at the hearing] talk to you, they will talk about the complexity and figuring how they can price for and cover themselves now for those periods where the ARPC won't be covering them.
3.29The Insurance Council of Australia also noted that compliance costs may mean reinsurance through the pool will cost insurers the same amount as reinsurance taken out through the private market. In particular:
The transaction costs for operational changes, compliance costs, and frictional costs will be significant and could be higher than the potential savings from the reinsurance pool. For example, the pool only covers flooding up to 48 hours which will mean insurers may seek reinsurance cover for over 48 hours, causing doubled strain on labour and resources.
3.30On the question of whether cyclone reinsurance will be more expensive for some insurers through the pool than in the private market, the ARPC advised that insurers ‘that have material exposure in high-risk regions are expected to see pool premiums lower than private market costs and will be able to achieve material savings to high-risk customers’. However, the ARPC advised that in the short term, ‘it is not anticipated that the existence of the pool will materially change the excess amounts taken up by policyholders’, but there may be reductions over time.
3.31Evidence from QBE indicated that the ARPC’s pricing ‘appears to be higher than perhaps we would have reasonably priced’ for policy holders at low or moderate cyclone exposure or risk, while evidence from RACQ suggested that ‘the most recent pricing, released in October, we think, is much closer to the mark in terms of what we see internally on our portfolio’.
3.32However, Allianz reported that its analysis of premium rates published in October 2022 by the ARPC indicated ‘average premiums to be offered to existing customers exposed to cyclone and related flooding risk will be around 6 percent lower than premiums that would have been offered had Allianz not transitioned to the pool’. In Northern Australia, Allianz calculated that the average impact would be around 9 per cent, and up to 30 per cent on average for some regions within Northern Australia—and for some customers, greater than 30 per cent.
3.33Given its concerns over premium pricing, RACQ called for a redesign of the pool, stating that it was unable to ‘identify how material improvements can be made to the pool without changing the legislation and regulations’. RACQ proposed that the Australian Government ‘immediately work to improve the pool through new consultation with individual insurers operating in the north’. RACQ argued that the ‘pool needs to come with a level of subsidy if there is to be any chance for the pool to deliver significant savings to many policyholders’.
3.34However, Mr Kewin stated that the organisation’s expectation was that ‘if we get the pool right, premiums should at least be more stable’, with this ‘hopefully’ leading to premium reductions.
Community expectations
3.35Mr Tyrone Shandiman, Chairperson of the Australian Consumers Insurance Lobby, provided further detail about what impacts consumers have expected would arise from the establishment of the pool:
I feel there have been a lot of broken promises with the Cyclone Reinsurance Pool, which consumers are extraordinarily disappointed with. The first one relates to the rollout time. We were told that on 1 July this year this would be implemented. We could not get clear information from the ARPC on when they were releasing the modelling to insurers… It wasn't until the last week of June that insurers received the final modelling from the Australian Reinsurance Pool Corporation…
Had that modelling been released earlier, consumers would have seen the benefit from 1 July [2022]. But they're not seeing it, because currently no-one is insured under the cyclone reinsurance pool.
3.36Similarly, Townsville Enterprise pointed out that consumers expected that the ‘benefits associated with the scheme would be delivered immediately’.
3.37However, Mr Brett Hagan from the Chamber of Commerce Northern Territory (NT) noted that despite the expectation that substantial savings would immediately appear for policy holders, the ‘reality is they could never appear that quickly’ because of the delay in implementation, and the savings generated by that implementation being passed on to the consumer.
3.38Nevertheless, the Townsville Chamber of Commerce noted that ‘the fact that the legislation is now in place and the reinsurance pool is operational is more progress in the last 12 months than we've made in Northern Australia in the last decade’.
New builds, new developments, and sunsetting
3.39The ACCC final report for the Northern Australia Insurance Inquiry examined the United Kingdom (UK) flood reinsurance scheme, under which the private and public sector have been given a significant period to implement mitigation and risk reduction responses. In particular, the ACCC acknowledged that despite the existence of the pool, ‘flood premiums for high-risk homes in the UK are still high’. Other initiatives proposed in the UK include claims payments incorporating an amount to repair homes in a way that would make them more resistant to reduce flood risk.
3.40Mr Hall from the Insurance Council of Australia noted that the UK’s flood reinsurance scheme (Flood Re) ‘took five years to come to fruition’, and it had a cut-off date so that new builds on a flood plain would not be covered. Mr Hall also pointed out that the United States Government ‘just wrote off $16 billion for their flood reinsurance scheme, and that’s because it gives developers false comfort to keep building homes on flood plains’.
3.41Considering these overseas examples, Mr Hall suggested that a cut-off date (sunsetting) would be needed over the long term for the pool. He proposed that when the pool is reviewed, consideration be given to ‘how we sunset a government reinsurance pool and force the market to deliver houses that can withstand cyclones’.
3.42The committee asked the Treasury about the consideration the Australian Government had given to sunsetting the pool’s coverage so that it does not extend to new builds or developments unless they meet particular standards or are built in lower-risk areas. The Treasury noted that the ‘Government is implementing the cyclone reinsurance pool as legislated by the previous Parliament’, with a review to occur in 2025 to determine if changes are needed.
Proposals to increase savings for consumers
3.43The Australian Consumers Insurance Lobby outlined several suggestions to increase savings for consumers generated by the pool, if premium costs do not reduce as much as expected. These suggestions were also echoed by other submitters and witnesses:
expanding the geographical regions that the pool covers (meaning that insurance companies providing cyclone insurance in those areas would be required to contribute to the pool);
the Government subsidising the pool;
mitigation—or, reducing the number of claims for the pool, thereby reducing the amount of premiums, by utilising a portion of premiums or obtaining separate funding from the Australian Government for mitigation on a cost/benefit basis; and
removal of state and territory stamp duties and levies on consumers.
Evidence on the scope and size of the pool
3.44Some submitters and witnesses called for the pool to be expanded to cover other areas of insurance for natural disasters, such as flooding. For example, the Australian Consumers Insurance Lobby argued that the pool should cover insurance where premiums are unaffordable or unavailable—in areas such as flood, bushfire, storm surge and insurance for leisure operators and building surveyors. Others were not in favour of considering this until it is clear that the pool is working.
3.45However, witnesses from the National Insurance Brokers Association, while in favour of considering expanding the pool, noted that the major risk in Northern Australia is cyclones, and suggested that the pool is not ‘the solution to every problem’.
3.46The Townsville Chamber of Commerce and the Chamber of Commerce NT were not in favour of expanding the scope and size of the pool beyond Northern Australia or cyclone and flood-related insurance, for now, with the latter arguing that the NT and Queensland cannot carry the cost of the pool alone, and ‘real value in dollars that the insurers receive comes from the southern states’.
3.47Mrs Marjoribanks from IAG also suggested that cross-subsidisation could be increased within or across eligible members of the pool.
Mitigation and adaption
3.48The Insurance Council of Australia pointed to ‘other levers for addressing insurance affordability’, including:
increased investments by governments in resilience measures, such as through the Disaster Ready Fund; and
state governments to amend land use planning legislation to introduce mandatory requirements for planning approvals to consider property and community resilience to extreme weather events, and to improve building codes so that future homes are better able to withstand extreme weather events.
3.49Adjunct Professor Colin Dwyer called for more spending on mitigation and adaptation research and, as a result, improved spending on mitigation.
3.50Mr Andrew Hall from the Insurance Council of Australia informed the committee that reinsurers and global capital ‘are looking very carefully to see what Australia is doing in terms of resilience and mitigation so that they're not backing something that they're losing money on’.
3.51However, the committee was informed by Mr Scofield that Allianz ‘don’t see the amount of expenditure going into mitigation and resilience over the short to medium term… as having a material impact on a large number of customers who are vulnerable to cyclones or related flooding’, with Allianz primarily concerned about ‘the uncertainty of changing weather patterns and climate change’.
3.52The ARPC advised in answers to questions on notice that it has commenced engagement with experts to determine further risk mitigation incentives for small business and strata properties. It currently provides discounts for risk mitigation for home, small and business strata policies for properties that have:
been elevated off ground level to reduce flood and storm surge vulnerability;
been constructed in recent years where additional buildings standards apply;
a roof construction material that is expected to be more resilient to cyclone damage; and/or
a building construction material that is expected to be more resilient to cyclone damage.
3.53Further, for home policies, there are discounts for properties that have:
been built prior to 2012 and have either braced or retrofitted their roller doors (compliant with AS 4505:2012);
window protection installed on all windows;
been built prior to 1982 and have upgraded their roof tie-downs; and/or
been built prior to 1982 and have completed a full roof replacement to current standards.
Reform of state stamp duty and GST
3.54Some submitters and witnesses called for changes to stamp duty and GST. As Mr Tyrone Shandiman from the Australian Consumers Insurance Lobby told the committee:
Bear in mind that the government is already receiving revenue from GST that is collected on insurance premiums, so stamp duty is just double-dipping. Consumers paying 20 times as much for their insurance in Northern Australia are paying 20 times as much stamp duty on that, and it's not a fair way of applying duties to policyholders.
3.55The Insurance Council of Australia also pointed to state stamp duty and GST on insurance policies as an area for reform. The Council noted that state stamp duty and GST add to premium costs for consumers, with households in the Northern Territory and Queensland paying around 20 per cent more stamp duty and GST than households in the rest of Australia.
Budget neutrality
3.56Mr Nicholas Scofield, Chief Corporate Affairs Officer from Allianz, outlined the main impact of budget neutrality on premium costs:
There is so much money within the design of the pool that can be allocated to the risks. It's designed well in the sense that most of that is going to the high risks, but it means, for the large proportion of people, with the low to medium risks, the premium reductions are very modest. Without a subsidy that won't change.
3.57Allianz recognised in its submission that ‘the revenue neutrality constraint will limit the [pool’s] ability to reduce premiums to all customers experiencing affordability challenges’. RACQ also questioned whether there will be widespread premium reductions if the pool is designed to be budget-neutral, and suggested that changes to cost neutrality involve ‘investigating the opportunities for government subsidisation of the pool or direct subsidisation to homeowners’.
3.58Similarly, the Townsville Chamber of Commerce, while not in favour of changes to ‘the scope or spread’ of the pool until the pool is fully operating, suggested that budget neutrality will not allow the pool ‘to be either effective, or sustainable’. It called for the cost modelling of the pool to be reconsidered, given that the Terrorism Reinsurance Pool—which was established under an earlier iteration of the same legislation in 2003 and is also managed by the ARPC—is ‘generated through contributions from every commercial property insurance holder in Australia’. The Chamber suggested that this is in contrast to the Cyclone Reinsurance Pool ‘which only receives contributions from insurance companies with eligible policies’, but nonetheless is ‘expected… to operate annually on a cost neutral basis’.
3.59Mr Shandiman from the Australian Consumers Insurance Lobby suggested that making the pool revenue-neutral on a 10-year basis ‘would allow the ARPC to flatten… premiums over time and not just look at it year by year’. However, Allianz argued that subsidies, rather than changing the budget neutrality requirement to a 10-year cycle, would see material benefits to most policy holders.
3.60Dr Christopher Wallace, the Chief Executive of the ARPC, told the committee that the ARPC was pricing ‘on a long-term basis to be cost neutral to government’, meaning that ‘in some years we'll be in deficit and in some years we'll be in surplus’. However, ‘on average over a very long time horizon, the policy objective is to break even or to be cost neutral to government’. He further explained that the ARPC was not pricing the reinsurance product for a one-year period but, rather, ‘for a future year’. In deficit years, the ARPC ‘may need to draw upon the Commonwealth guarantee, which is $10 billion, and obviously from our assets that we've built up as well’.
3.61The Head of Actuarial at the ARPC, Mr Pulkit Jain, noted that there is no definition of ‘long-term’ in the legislation, stating that ‘over a long period of time, we’re going to be cost neutral. It’s not easy to define exactly what that time period is’, but the ARPC is ‘trying to think about all possible events and eventualities that could occur’. He informed the committee that if there was a more prescriptive time period, such as 2023, the ARPC would have to charge extremely high premiums to be cost neutral to take into account a wide range of possible extreme events that could occur across that year.
3.62Dr Wallace suggested that if the pool was revenue neutral on an annual basis, the ARPC would have to model and, therefore, reprice, for a $5 billion cyclone in that year. He argued that having cost-neutrality on a long-term basis enables the ARPC to ‘smooth out’ the risk of a $5 billion cyclone over time. He further outlined the risk of being prescriptive about timeframes:
…if we look forward over the next three or four years, there's an 80 per cent chance that the pool will be in surplus and approximately a 20 per cent chance that the pool will be in deficit. If we're very prescriptive on the time frame, it could actually inadvertently result in larger swings in premiums…
I think the benefit of… the legislative obligation being long-term break even gives the [ARPC] the ability to discuss with the government, incident by incident, how we might respond and keep premiums stable.
Length of 48-hour period of coverage after downgrading of a cyclone
3.63Some evidence argued that the 48-hour damage period, following the downgrading of a cyclone (see chapter two), does not take into consideration the damage caused to other parts of Northern Australia by ex-tropical cyclones as they move across the country, such as flooding after a cyclone turns into a tropical low.
3.64At present, the pool provides cover for the length of a cyclone, and an additional 48 hours. In the private market, insurers typically buy reinsurance for seven days, no matter the length of the cyclone, with the insurer deciding when that coverage starts.
3.65The ARPC has stated that it anticipates that riverine flooding may continue beyond the pool coverage period, but most of this, according to modelling, will likely occur outside Northern Australia.
Evidence in support of increasing the 48-hour period
3.66Most submitters and witnesses, including insurance companies, considered the 48-hour period too short to take into account longer effects of a cyclone once it has been downgraded. Evidence from the Insurance Council of Australia indicated most of its members agreed with the idea of extending coverage to seven days after a cyclone has been downgraded.
3.67QBE, for example, believed the period should be extended to seven days for related flooding after a cyclone. It advised that limiting the coverage provided by the pool to damage occurring within 48 hours after a cyclone is downgraded ‘will also result in additional costs (frictional costs) associated with determining whether claims occurred within this timeframe’ (such as hydrology reports). Further, extending ‘the timeframe would reduce the complexity (including frictional costs…) and potential customer impacts (including delays and inconvenience)’.
3.68Mr Joshua Cooney, the General Manager of Advocacy at RACQ, argued that as it currently stands, ‘the pool only provides partial reinsurance cover’, pointing to Cyclone Oswald in 2013 as an example of a cyclone that caused almost all its damage 48 hours after it was downgraded.
3.69RACQ proposed that the period be aligned with that of global reinsurance contracts—that is, 168 hours. It argued that limiting the period to 48 hours will ‘force RACQ to purchase additional cyclone reinsurance cover from the global market’ so that damage caused by ex-tropical cyclones ‘with a long duration [does] not leave us dangerously exposed’. RACQ argued that this ‘type of “spill over” cyclone cover is untested in the global reinsurance market’, and reinsurers will add a premium to the cost of reinsurance cover to account for the uncertainty.
3.70IAG argued that in general, ‘the more the ARPC covers, the less the reinsurer retains, and the less premium [is] charged to the insurer’. However, it did acknowledge that it would be difficult for IAG to quantify the benefit of extending the 48-hour period ‘as it is based on reinsurer pricing, and… [w]e also place reinsurance with multiple reinsurers who would each have a different view of their pricing components’.
3.71Mrs Christa Marjoribanks from IAG explained some of the challenges for insurers with the 48-hour damage period:
In terms of our position, we are supportive of the extension to seven days. That's partly because of that reinsurance interaction and it's also because at the claims time, when we are looking to decide or determine what is recoverable from the pool and what is recoverable from our other reinsurers, we need to then determine whether that flooding occurred within the 48 hours or afterwards. That may be quite a difficult exercise, particularly if we have to go and ask customers who may have been evacuated and might not actually know when the flood hit their property.
Evidence for retaining the 48-hour period
3.72Only Allianz expressed explicit support for retaining the 48-hour period. Allianz’s argument was that the 48-hour clause provides coverage ‘for the period that a cyclone commences until the time a cyclone ends, whether that is a two-day cyclone or a two-week cyclone’, while current reinsurance arrangements are for seven days only, no matter how long a cyclone lasts. They informed the committee at the public hearing that:
That provides the best protection in terms of cyclone risk for our balance sheet. It also provides the most defined mechanism able to be transferred cleanly into global reinsurance markets. The bringing in of a seven-day clause would create significant challenges in terms of directly identifying which parts of the country might be impacted by a weather system seven days post a cyclone and therefore dilutes the ability to cleanly assess the risk and cleanly transfer it. That uncertainty will translate into higher reinsurance costs because we'll be double insuring.
3.73In particular, Allianz expressed concern that extending the 48-hour period would mean that flooding from an ex-tropical cyclone in the southern part of the country—such as Sydney—would ‘lead to a dilution of the savings that are able to be realised through reinsurance’ for policy holders in Northern Australia.
3.74Allianz expressed its ‘in principle’ support for the pool being expanded to cover non-cyclonic flood as ‘a much more effective way’ to address the issue of flooding that occurs 48 hours after a cyclone has been downgraded, rather than extending pool coverage to seven days after a cyclone has been downgraded.
Position of Treasury and the Government Actuary
3.75The Treasury explained that consideration was given to a range of periods when the pool was being developed. Ms Mohita Zaheed, Acting First Assistant Secretary, Financial System Division that traditional policies do not differentiate between cyclone-related flooding and flooding; rather, they only cover floods. Further, these policies are ‘generally structured on a seven-day coverage period and there's a reinstatement and then you're covered for the next seven days’. Ms Zaheed contended that the argument that seven days would mean the pool aligns with existing global reinsurance programs is:
…not quite that straightforward, because those programs just write policies on a very different basis, which is that you're covered for seven days, then you pay another bit, then you're covered for another seven days.
3.76The Australian Government Actuary, Mr Guy Thorburn, told the committee that ‘the longer the period of time, the wider the geographic area that would ultimately be covered and draw away the resources of the pool to that wider geographic area’. His judgement was:
…a shorter period was more likely to deliver benefits that were in line with the policy objective, which is to deliver savings to Northern Australia, by not drawing away the resources to that wider area.
3.77However, Mr Thorburn acknowledged that ‘any period here’ creates challenges for insurers and the pool ‘because the costing of the flood component through flood models doesn't tend to discriminate between cyclone-related flood and non-cyclone-related flood’. He stated that ‘there is work to be done’ to determine how to split flooding and cyclone-related flooding reinsurance covered by the pool. The uncertainty created by this distinction contributes to the potential for ‘double charging, where the pool feels it needs to charge for a certain amount of flood, and the insurers feel they need to charge for a certain amount of flood’. Ultimately, he believed the modelling uncertainty will reduce over time as the pool operates further.
3.78If the 48-hour period was extended to seven days, Mr Thorburn informed the committee that ‘the total premium collected would need to go up because there would be more claims’, and work would need to be undertaken to determine the extent to which this policy change would draw savings away from Northern Australia ‘which it may well do’. This was echoed by the ARPC in answers to questions on notice, who added:
Pool premium rates for insurers writing risks in Southern Queensland, New South Wales and Southwestern Australia would be expected to increase to allow for the increased exposure to cyclone-related riverine flood claims in these regions. However, this should be offset by reductions in private market reinsurance costs for insurers and the net impact should not be material…
Similarly, the impact on policyholder premiums is unlikely to be material as the reallocation of reinsurance costs between private market reinsurance and the pool should approximately offset.
3.79The Treasury advised in answers to questions on notice that estimates of the cost of reinsurance that insurers purchase to cover claims beyond the 48-hour period ‘have been factored into the modelling of anticipated premium savings’.
Views of the ARPC on the 48-hour period
3.80The ARPC advised that insurers would need to undertake additional work to take into account any changes to the pool, meaning this could delay them joining.
3.81On the question of whether extending the coverage period would lead to reduced benefits for policy holders in Northern Australia because of cyclones travelling further south in the days after a cyclone is downgraded, the ARPC noted:
In South Australia, Tasmania, Victoria, ACT, and the majority of NSW… the risk of cyclone-related losses is so low as to be considered negligible and ARPC does not charge insurers any premium for this coverage.
Similarly, insurance policies in all regions of Australia generally will cover cyclone losses if they occur (e.g., in Sydney). However, because the risk is so low in southern regions, insurers will not charge policyholders any premium for this coverage.
The number of policyholders that are covered for cyclone risk would not change. However, the number of policies that are charged a pool premium by ARPC is expected to increase.
Incentives for insurers to provide coverage in the Northern Australia market
3.82Some evidence called for incentives for insurers to join the pool. For example, the National Insurance Brokers Association of Australia argued ‘the current design of the pool does not provide any incentive for insurers who have already exited the Northern Australian market to return, or for those still active in the market to join the pool earlier in the transition period’. The Association provided feedback from its members indicating:
there are very few insurers willing to write cover for cyclone-exposed risks;
of those that still write cyclone risks, a number have placed embargoes on new risks; and
there is nothing preventing these insurers from gradually declining to renew existing cyclone-exposed risks until eventually they are no longer required to participate.
3.83The Townsville Chamber of Commerce argued that ‘participation by a significant number of retail insurers will be required’ for ‘a truly sustainable competitive marketplace to be established’, particularly because the pool ‘is currently modelled on the assumption that by reducing the cost of reinsurance to the insurance retailers, they will willingly participate in the market’. As such, the Chamber proposed that the pool be modelled on quantifiable outcomes, including the availability of insurance products in Northern Australia, and price parity of insurance products compared with other similar risks in other markets. Previous measures that it had proposed included:
requiring insurers to provide insurance across all of Australia;
governments to provide a baseline level of insurance in failed markets; and
governments to abolish additional fees, stamp duty and GST on insurance premiums.
3.84The Insurance Council of Australia advised that there ‘are currently no indications of insurers looking to exit the market’.
3.85The ARPC suggested in its submission that the pool will ‘lower barriers to enter the market for those insurers not currently writing business in cyclone-prone areas’ and premiums will be ‘more stable’, as they will not be responding to international market cycles and short-term market pressures.
3.86As outlined in chapter two, the ARPC believed the benefits for insurers to join the pool include the following:
insurers will not be required to hold capital, as they are required to otherwise by the Australian Prudential Regulation Authority, meaning insurers may have surplus capital to invest in their business; and
insurers will be able to provide reduced premiums in medium- and high-risk areas than what would have otherwise been the case, meaning there is the potential for insurers to sign up more policy-holders.
Marine insurance
3.87The Australian Consumers Insurance Lobby had concerns about the roll-out of marine insurance, due to take effect from 1 July 2023, given the previous delay in releasing modelling to insurers. It called for the modelling to be released no later than 31 March 2023 to enable time for insurers to update their pricing and administrative arrangements to join the pool sooner rather than later.
3.88However, evidence from the Insurance Council of Australia suggested that ‘there is no particular difference in marine insurance premium levels in Northern Australia relative to southern Australia’—or, less than five per cent across the portfolios of the Council’s members. This was because of premium increases arising from claims history, because of business operators hiring out boats to people with varying degrees of sailing experience, rather than additional cyclone and natural underwriting risk in Northern Australia. The Council also noted that marine insurance portfolios include significant coverage for exposures outside Australia, with reinsurers providing ‘treaty protection for perils and catastrophes anywhere in the world’, which is provided worldwide; hence, reinsurers do not price for cyclone events in Northern Australia. It argued that ‘there will be no saving of reinsurance premium paid by marine insurers by entering into’ the pool.
3.89QBE advised in answers to questions on notice that it would likely need a minimum of six months, with perhaps a slightly longer transition period, to transfer its relevant marine policies to the pool.
3.90The committee notes, as outlined in chapter two, that despite a February 2022 factsheet from the Treasury stating that coverage for small business marine property insurance policies will be included in the pool from 1 July 2023, there does not appear to be any information published on marine insurance on the ARPC’s website.
Impact of climate change on the operation of the pool
3.91The Insurance Council of Australia was of the opinion that ‘targeting climate change is the single greatest solution to home insurance affordability for households most impacted by increasing natural peril risks’.
3.92The ARPC acknowledged that while ‘the specific impact is highly uncertain’, climate ‘change is expected to impact the frequency, severity, and location of cyclones’. It argued that ‘the pool design has settings that provide for the management of this changing risk’ and the ARPC has based its premium rates on ‘the best available current view of the risk’, with these rates reviewed on an ongoing basis. The ARPC is due to publish a financial outlook report in 2024, with this report to ‘comment on the adequacy of the premium rates and consider the ongoing impacts of climate change on ARPC’s exposure’.
3.93The ARPC advised that if a single cyclone event or series of cyclone events within a single year would see the Commonwealth’s $10 billion guarantee exceeded, a mechanism is available to enable the Commonwealth to increase its guarantee to meet relevant claims. That is, ‘in the design of the pool, we have the ability to adjust premium rates over time as those impacts become more certain’. The ARPC will, in future annual financial outlook reports, ‘comment on the adequacy of the premium rates’, and will have an annual premium review process to take into account future improved understanding of the impacts of climate change on cyclone events.
Differences across states and territories
3.94Some evidence highlighted differences in insurance coverage across different jurisdictions. For example, the Chamber of Commerce NT stated that the most significant issue for the NT is a ‘lack of interest from insurers even in participating’ in the region, with ‘barely less than 10 or 15 that actively wish to participate in our marketplace’. Mr Brett Hagan from the Chamber argued that ‘it’s very easy for them to just not say they wish to participate because we’re such a small market’ and flagged the need for more insurers in the market given the NT is currently seeing less participation.
3.95The Insurance Council of Australia was of the opinion that it ‘is difficult to forecast the pool’s impact on coverage, price and competition in the Northern Territory, as there are many exogenous factors that impact the market conditions’. It called for mitigation investment, such as improvements in zoning, building codes and land use planning, along with individual and community-based mitigation measures. It pointed to the Queensland Government Household Resilience Program to cyclone-proof homes, which ‘led to a reduction in premiums of 8.5% with no material changes in the number of insurance providers’.
3.96Mr Hall from the Insurance Council flagged some of the key issues for insurance in Western Australia, including:
building standards and codes over the Western Australian coastline;
the fact that the north-west is one of the main areas of cyclone activity in the country; and
the region has sparse populations with shires not equipped to rebuild after cyclones.
3.97The ACCC in answers to questions on notice stated that it is monitoring information on the number of insurers in particular postcodes as part of its role in monitoring insurance prices. It previously provided data on eight insurers supplying insurance by postcode in the north of Western Australia, the Northern Territory and North Queensland as part of its Northern Australia Insurance Inquiry.
Concerns raised about the role of the ACCC
3.98Some submitters raised concerns about the role of the ACCC in monitoring insurers and called for more explicit information on what it monitors. For example, the Townsville Lot Owners Group proposed there be more clarity from the ACCC ‘on what is to be monitored and reported’, including what data the ACCC will obtain.
3.99According to a media report in February 2023, the Townsville Lot Owners Group suggested that the ACCC figures on average premiums for residential combined building and contents insurance in Northern Australia in 2021–22 was incorrect and that North Queensland strata premiums are about 10 times the ACCC’s figure for the remainder of Australia. The Townsville Lot Owners Group argued that the ACCC data in its December 2022 report used insurers’ home insurance selling prices rather than the home insured consumer buying prices.
3.100The ACCC’s 2022 report on the pool found that the average premium in 2021–22 in Northern Australia for residential combined building and contents insurance was around $2370, compared to around $1350 for the remainder of Australia. Strata insurance was almost double the premiums paid by the rest of Australia, at around $7740 for Northern Australia compared with $2940. The ACCC did provide several caveats, including:
its information was based on data and information ‘from select insurers’;
figures showed average premium outcomes up until 30 June 2022 and therefore may not necessarily reflect individual experiences of particular policy-holders; and
figures may not reflect more recent premium changes and ‘very large recent increases for certain policyholders, in excess of our average premium findings’ about which the ACCC had received information.
3.101In evidence provided to the Senate Economics Legislation committee on 15February 2023 at Senate Estimates, Ms Gina Cass-Gottlieb, Chair of the ACCC, advised Senator Susan McDonald that the purpose of the ACCC’s initial report was to provide baseline data on the operation of the pool. Subsequent ACCC reports would then be able to measure the impact and effectiveness of the pool. Ms Cass-Gottlieb noted that the ACCC reported its figures on an average basis, whereas it may be that the Townsville Lot Owners Group had used individual figures. The ACCC undertook to investigate the matter further and respond to the Senate Economics Legislation committee on notice.
3.102The ACCC also stated that it intended to visit the region to hear from ‘consumer groups, residences, lot owners, and other community members’ on these matters.
3.103Further, the ACCC, in a response to a question on notice from the committee, provided contact details that members of the public and industry can use to bring concerns about price gouging or insurance premium increases in Northern Australia directly to the attention of the ACCC. The email contact is insurancemonitoring@accc.gov.au.
3.104Concerns were also expressed about a lack of performance information provided by the ACCC in its 2022 report, with Adjunct Professor Colin Dwyer calling for the ACCC to provide performance information earlier than scheduled in July 2023, given that no insurers had joined the pool at the time of the ACCC first report.
Other issues raised
3.105In general, submitters and witnesses were in favour of waiting to see whether the pool as it currently operates will meet its policy objectives.
3.106For example, the Townsville Chamber of Commerce suggested that the ‘scope or spread’ of the pool and amendments to the legislation should not be carried out until:
the pool has properly commenced operation;
insurance companies have joined and taken out reinsurance through the pool; and
the ACCC has had the full opportunity to undertake its monitoring role.
3.107By contrast, RACQ urged the committee ‘to recommend that the Federal Government immediately [work] to improve the pool through new consultation with individual insurers operating in the north’, arguing:
the pool in its current form will fail to achieve its policy objectives of improving access and affordability of property insurance in cyclone prone areas; and
the pool will fail to meet the expectations of RACQ’s 300 000 members in the north.
3.108Evidence from the Ms Sarah Proudfoot, Executive General Manager of the Infrastructure Division at the ACCC, also noted that the ACCC had recommended that the former Government consider subsidies rather than establishing a reinsurance pool, given that research has found that reinsurance pools are typically more effective where there is no competition or no insurance coverage available in the private market.
3.109Other issues raised in evidence included:
questions about why joining the pool should be mandatory if insurers are able to prove that they are able to obtain cheaper reinsurance elsewhere;
more requirements for participation to enable more options for policy holders, given, for example, the limited number of insurers wishing to operate in the Northern Territory;
why motor insurance is excluded from the pool, with RACQ proposing its inclusion but the Insurance Council of Australia indicating ‘there was no real support’ to include motor insurance among its other members;
a lack of standardised modelling used by insurance companies, leading to significantly different quotes for the same property; and
lack of involvement of people living in Northern Australia in government processes, with Adjunct Professor Dwyer suggesting that a review committee, consisting of ‘mostly Northern people’, be established to monitor the progress of the pool.
3.110The committee is aware of one other issue that arose during the Senate Economics Legislation committee’s examination of supplementary budget estimates on 16February 2023. Senator McDonald tabled a letter written to her by Racing Queensland on 12 August 2022.
3.111The Racing Queensland letter noted the following:
the economic and social contribution made by the industry in North Queensland;
in December 2021, the Morrison Government invited stakeholder views on exposure draft legislation and regulations to inform the establishment of the pool;
Racing Queensland made a submission to the Morrison Government Taskforce seeking consideration for increasing the proposed sums insured under the business property policy from $5 million to $25 million (which would provide eligibility for participation in the pool to North Queensland racing clubs based on their asset value); and
the Treasury Laws Amendment (Cyclone and Flood Damage Reinsurance Pool) Bill 2022 that passed through Parliament on 30 March 2022 provided a reinsurance pool for cyclone and related flood damage, covering residential, strata and small business property insurance policies up to $5 million in asset value.
3.112Racing Queensland stated that:
it is seeking consideration of an amendment to the legislation to enable a business with an asset value above $5 million to be able to insure up to $25 million with the pool;
the request is based on the significant and increasing cost of Industrial Special Risk (ISR) insurance, which Racing Queensland places and funds on behalf of race clubs located in North Queensland;
the ISR insurance premium increased by approximately 150 per cent in October 2021 for race clubs located above the Tropic of Capricorn (Rockhampton); and
this signalled a hardening of the market, which may ultimately result in unaffordable or uninsurable risk in the future.