Chapter 4Committee view and steps forward
4.1Evidence to the inquiry from the Bureau of Meteorology suggests that even though it is likely that the total number of tropical cyclones will decrease or remain unchanged in the future, it is very likely that the proportion of tropical cyclones that reach category four or five intensity, and the mean peak wind speed, total rainfall, and flooding events associated with tropical cyclones will increase with global warming.
4.2This is a sobering scenario. It reinforces the fact that a multi-faceted response is needed to ensure that Northern Australia remains liveable and can prosper into the future. Key aspects of that response include mitigation, building back better, improved building standards to improve overall resilience, and affordable insurance.
4.3The committee acknowledges that the Cyclone Reinsurance Pool (the pool) is not a ‘one-shot’ solution. That said, the committee considers that the optimal operation and implementation of the pool is vital to ensure insurance affordability in Northern Australia, and by extension, continued liveability and growth across this vast region.
4.4This is the committee’s first report on the Cyclone Reinsurance Pool. Preliminary evidence about the implementation of the pool has been limited because few insurers have signed up and the pool is still being rolled out.
4.5While the committee acknowledges that having legislation in place and the reinsurance pool being operational is progress, the committee has serious concerns about the ongoing implementation of the pool, as outlined below, and makes recommendations designed to improve scheme roll-out over the next several years, in the following areas:
the timing of future releases of modelling to insurers;
the clause in delegated legislation extending the pool’s coverage to 48 hours only after a cyclone has been downgraded;
monitoring of markets in parts of Northern Australia where there are very few insurers operating;
clarification about the roll-out (if any) of marine insurance;
land approvals and building codes in cyclone and flood-prone areas;
‘sunsetting’ the pool’s coverage of policies for new builds after a certain date; and
sum insured limits for business.
4.6Beyond these areas, the committee does not propose, at this point, making fundamental changes to the design of the pool, because:
there was not universal support for the changes proposed by some witnesses and submitters, as outlined in chapter three; and
it is too early to determine whether the pool is fit-for-purpose and effectively meeting its policy objectives.
4.7There will be further opportunity, once all relevant insurers have signed up by the end of 2024, to determine whether the pool is working properly, through a scheduled review of the legislation due to report after 1 July 2025, and at least once every five years subsequently. The committee also intends to consider the operation and implementation of the pool in 2024, once major insurers have joined the scheme.
Reasons why insurers have not joined the pool
4.8The committee began this inquiry to understand why community expectations of cheaper insurance premiums in Northern Australia had not yet been met, despite the pool commencing operation on 1 July 2022.
4.9As detailed in chapters two and three, as of February 2023, two insurers—Allianz Australia and Sure Insurance—had joined the pool. The remaining six major insurers are required to join the pool by 31 December 2023.
4.10The committee learned that insurers had not joined the pool and rolled out anticipated premium savings to their policy-holders because of the timing of information released by the Australian Reinsurance Pool Corporation (ARPC), and because insurers had existing reinsurance arrangements.
4.11The release of the modelling that insurers needed to make decisions and administrative and system changes occurred in June 2022, just before the beginning of the 2022–23 financial year. Insurers flagged this as an issue because they typically renegotiate their reinsurance contracts three months in advance. This meant insurers already had reinsurance programs for 2022 in place before the pool began operations on 1 July 2022.
4.12Further, some insurers have reinsurance arrangements in place per calendar year, while others have arrangements in place across several years. As a result, insurers have needed time to implement the new arrangements, including to determine what gaps they will need to cover through the private market.
4.13As such, the committee encourages the Australian Government to provide the modelling that insurers need well in advance of any future deadlines impacting the participation of insurers in the pool, and other deadlines likely to impact premium costs.
4.14The committee notes the ARPC evidence that insurers were provided with draft modelling before the June 2022 release, and acknowledges the benefits gained by further consultation on premium rates, which led to better modelling released in September 2022.
4.15However, access to draft modelling does not provide insurers with the certainty they need to make concrete business decisions. Individuals, families and businesses are suffering in Northern Australia and many may be considering leaving the region because of unaffordable insurance. Delays in the timing of final releases of modelling have significant flow-on effects, both on the cost of insurance policy premiums, and for the public’s trust that the pool is achieving its intended policy outcomes.
4.16The committee recommends that the Australian Government ensure that future releases of modelling are provided well in advance of key dates in the ongoing roll-out of the Cyclone Reinsurance Pool.
Community expectations
4.17Community expectations about the benefits of the pool have been high. The committee recognises that, in part, this reflects the scale, seriousness, and urgency of the insurance issue. However, the committee considers it unfortunate that in the previous Parliament, the Government raised expectations above what the pool could reasonably be expected to deliver in terms of the scale and timeframe of premium reductions. There is an important lesson here for government about managing community expectations during the roll-out of a scheme.
4.18In the meantime, building costs have increased and other natural disasters have increased insurance premium costs around Australia. The committee reminds the Australian Government of the need to emphasise that the benefits of any new government policy or program typically take several years to materialise.
4.19That said, the committee welcomes recent efforts to improve mitigation through various state and Commonwealth programs, such as the current Australian Government’s Disaster Ready Fund, which has now been passed by the Parliament and amends the Emergency Response Fund Act 2019 to enable up to $200 million per financial year to be invested in natural disaster resilience and risk reduction.
Budget neutrality
4.20The committee notes the concerns raised during the inquiry about the impact of the budget neutrality requirement on the pool’s reserves and premium costs. Committee members questioned witnesses closely to determine whether making the pool revenue-neutral over a period of a year, or 10 years, would help to mitigate this issue.
4.21The committee notes that some insurers would prefer that budget neutrality be calculated using a more precise period of time. On balance, the committee is satisfied that the current requirement for the ARPC pricing on a long-term basis to be cost-neutral to the Australian Government is sufficiently flexible to allow for several years of major cyclone damage without a significant impact on premium costs. If the timeframe was too prescriptive, modelling would have to take into account the possibility of a major cyclone event occurring during every period prescribed by that timeframe (despite major cyclones with significant damage costs not necessarily occurring every year, if the timeframe was prescribed to be 12 months). This would have the effect of increasing, rather than reducing, premium costs. Nonetheless, the committee proposes that the Australian Government consult with insurers further on this matter.
Length of 48-hour damage period
4.22Not all evidence provided to the inquiry was in favour of extending the 48-hour damage period to seven days. Reasons given to support extending the period included:
the current period may not take into account damage caused to other parts of Northern Australia by cyclones after they are downgraded, such as flooding; and
in the private market, insurers typically take out reinsurance for seven days, no matter the length of the cyclone.
4.23The committee notes that unlike the private market, the pool covers damage incurred during the entirety of a cyclone, no matter how long it is, plus an additional 48 hours. Since 2000–01, there have been 14 cyclones in the Australian region that made landfall and lasted more than seven days. Determining the extent of the damage caused by these cyclones is beyond the scope of this inquiry’s terms of reference. However, extended cyclones are common, and they have the capacity to cause destruction across Northern Australia.
4.24The risk of extending the 48-hour period to a seven-day period following the downgrading of a cyclone (rather than making the damage period seven days in total, including while a tropical low is declared a cyclone), is that tropical lows will drift further south, and policy-holders in areas such as Sydney will then be able to claim for cyclone-related damage, leading to less benefits for policy-holders in the north, where insurance premiums are unaffordable compared with the remainder of the country.
4.25Such a change would lead to increased premium costs to take into account the increased number of claims that would arise. It would not align with the policy objective of the pool: that it lead to reduced insurance premiums for people in areas with unaffordable insurance premiums (largely Northern Australia). Further, the work that insurers would need to undertake to implement this change may lead to further delays in their joining the pool and rolling out benefits to policy-holders in Northern Australia.
4.26The committee is not of a mind to propose changes to this clause while insurers are yet to join the pool, given these changes may lead to further delays in insurers joining and dilute the benefits for policy-holders in Northern Australia. Nevertheless, the committee acknowledges that many insurers were in favour of extending the time the pool covers following the downgrading of a cyclone. The committee recognises that, with a changing climate, cyclone-related flooding after a cyclone has been downgraded may cause more extensive damage than has historically been the case.
4.27That said, the committee notes that the 48-hour clause is found in delegated legislation, which allows the executive government to change administrative detail without undue delay. That is, changes to delegated legislation can be made immediately, usually by the responsible minister, without requiring the passage of an amending bill through the Parliament. As such, the committee recommends that the Australian Government maintain a watching brief on the impact of the 48-hour clause on insurance in Northern Australia, particularly as new cyclones arise, and adjust this clause if deemed necessary.
4.28The committee recommends that the Australian Government review:
the availability and coverage of insurance in Northern Australia, specifically the insured versus the uninsured, including non-participation; and
the impact of the 48-hour clause on the cost of insurance premiums for Northern Australians, and the availability of insurance in the region as part of the built-in review in 2025, and adjust this clause if necessary.
Thin markets and benefits for insurers to join the pool
4.29Indirect benefits already exist for insurers to join the pool, such as the increased ability for insurers to offer more affordable policies in medium- and high-risk areas. However, the committee notes that there have been calls for further incentives for insurers to join the pool and provide insurance coverage across Northern Australia.
4.30Thin markets, or markets that have only a small number of participants selling and purchasing, are an issue across sectors in Northern Australia, not just insurance. However, there are varying degrees of thinness, with much of the Northern Territory having very limited insurance options compared with other parts of Northern Australia.
4.31If the anticipated benefits of the pool are not realised within the next several years, the committee encourages the Australian Government to consider additional incentives for insurers to join the pool, particularly those who have exited the market or never entered it in the first place. On the matter of thin insurance markets in general, the committee suggests that the Australian Government undertake extensive consultation to determine what measures governments could implement to encourage better choice and diversity in the Northern Territory and other parts of Northern Australia where insurance coverage is limited.
4.32The committee notes that the Australian Competition and Consumer Commission (ACCC) has been directed to monitor the prices, costs and profits relating to the supply of insurance cover before and after the introduction of the pool. The committee recommends that the Australian Government also explicitly direct the ACCC to monitor the state of the cyclone insurance market in Northern Australia as part of this function.
4.33The committee recommends that the Australian Government direct the Australia Competition and Consumer Commission to monitor the cyclone insurance markets in Northern Australia, and report on:
instances where thin markets may be impacting both insurance coverage and cost; and
market participation, specifically under-insurance and the issue of lack of insurance in some areas.
Marine insurance
4.34Evidence presented to the inquiry called for modelling related to marine insurance to be finalised well-ahead of the roll-out of marine insurance. However, the committee was unable to locate any information on the Australian Reinsurance Pool’s website or in recent documents released by the current Government about whether marine insurance will indeed be included in the pool’s coverage.
4.35In the first instance, there needs to be clarity on whether marine insurance will be included in the pool, given the Insurance Council of Australia’s evidence that there is no particular difference in marine insurance premium levels in Northern Australia relative to southern Australia. Second, if marine insurance will be included, the committee reiterates its comments made above about the timely release of modelling.
4.36The committee recommends that the Australian Government announce a position on the inclusion of marine insurance in the Cyclone Reinsurance Pool.
Mitigation and other initiatives
4.37Throughout the inquiry, the committee received evidence calling for other initiatives to help reduce the cost of insurance premiums. These proposals included reform to (state) land use planning legislation and building codes, as well as ‘sunsetting’ the coverage of the pool to policies for old builds only.
4.38The committee considers these proposals have merit. The Australian Government and taxpayers should not be subsidising poor market decisions, whether about the location of a new development or poor building design and materials.
Land use approvals and building codes
4.39The committee notes recent work done to improve building standards through the Australian Building Codes Board, including specifications for the design of buildings in cyclonic areas.
4.40However, more work needs to be done, particularly on the matter of developmental approvals in flood-prone areas that may be impacted by cyclone-related flooding. The committee received limited evidence about current initiatives in the areas of land use planning and building codes, and it is beyond the remit of the committee in this inquiry to examine the issue at length.
4.41Further, the committee recognises that land use planning is a state-based issue. However, land use planning and building codes are central to disaster mitigation and resilience as well as the success and ongoing financial sustainability of the pool. One option would be for the Australian Government to facilitate a coordinated approach to land use planning, building codes, mitigation and disaster resilience that includes the National Emergency Management Agency and other levels of government.
4.42The committee recommends that the Australian Government facilitate a coordinated approach to land use planning, building codes, mitigation and disaster resilience that includes the National Emergency Management Agency and other levels of government.
Sunsetting
4.43At this point, the committee reserves judgement about whether to ‘sunset’ the pool’s coverage of policies for new builds past a certain date. The committee considers it vital that the implementation and ongoing operation of the pool avoid unintended consequences. Given, as mentioned above, the committee is of the opinion that governments should not be subsidising poor market decisions, the committee recommends that this issue be revisited in future reviews of the pool, such as the review of the relevant legislation scheduled to be provided after 1 July 2025.
Recommendation 6
4.44The committee recommends that the Australian Government’s 2025 review of the Cyclone Reinsurance Pool consider:
evidence and data on whether to ‘sunset’ the Cyclone Reinsurance Pool’s coverage of policies for new builds past a certain date; and
how to reinforce the policy objective of the Cyclone Reinsurance Pool to move to parity of cost and access for all Australians.
Stamp duty and GST
4.45Some evidence proposed reform of state and territory stamp duty and goods and services tax (GST), which are typically 20 per cent higher for policy-holders in Northern Australia, because of the high cost of insurance premiums.
4.46The committee suggests the Australian Government keep an open mind about initiatives like stamp duty and GST reform to help reduce the cost of premiums. One option the committee raises here is for state governments to use additional stamp duty revenue to invest in mitigation. The Australian Government could consider bringing the issue of stamp duty and GST reform to intergovernmental meetings, particularly if the anticipated benefits of the pool are cancelled out by increased costs of building materials because of inflation and issues in the building and construction industry.
The ACCC’s role
4.47The committee notes allegations reported in the media that the ACCC 2021–22 figures on average premiums for residential combined building and contents insurance were incorrect, and that the ACCC had not balanced data sourced from insurers with consumer tax invoices (that is, the ACCC had used ‘selling’ prices rather than ‘buying’ prices). The committee also acknowledges the ACCC’s caveats in its report, including that its figures may not reflect some very large recent increases for certain policy-holders that exceeded the ACCC’s average premium findings.
4.48As noted in chapter three, the committee understands that the purpose of the ACCC’s initial report was to provide baseline data on the operation of the pool and that subsequent ACCC reports would then be able to measure the impact and effectiveness of the pool. The committee understands that the ACCC reported its figures on an average basis, whereas it appears the Townsville Lot Owners Group used individual figures. The committee expects that the ACCC’s response on notice will be sufficiently fulsome to answer the question of the apparently substantial discrepancies between the figures in the ACCC report and those reported by the Townsville Lot Owners Group.
4.49Finally, the committee acknowledges the concerns that members of the public have raised about the ACCC’s role. To that end, the committee sourced direct contact details from the ACCC. Members of the public and industry can use these contact details to bring concerns about price gouging or insurance premium increases in Northern Australia directly to the attention of the ACCC (see contact details in paragraph 3.103 in chapter 3).
Business property policy—sum insured
4.50As detailed in chapter three, the committee is aware of the sum insured limit under the business property policy. The committee notes that Racing Queensland 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.
4.51The committee notes that while Racing Queensland made a submission to the Morrison Government on this matter, the legislation that was passed by the previous Parliament covers residential, strata and small business property insurance policies up to $5 million in asset value.
4.52The committee considers it appropriate for this matter to be considered in future reviews of the Cyclone Reinsurance Pool.
4.53The committee recommends that future reviews of the Cyclone Reinsurance Pool consider the sum insured limit under the business property policy.
Additional issues raised during the inquiry
4.54The committee recognises several issues related to the pool require further consideration. These include:
insurance for on-farm infrastructure and agribusiness; and
strata insurance.
4.55The committee notes that this report is the first of a number of reports that the committee intends to undertake on the Cyclone Reinsurance Pool.
Climate change
4.56The cyclone reinsurance pool must be developed in tandem with a strong investment in the mitigation and shielding of Northern Australia regions from increasingly volatile natural disasters.
4.57As noted throughout the report, the Australian Government must pull other levers in order to address affordability. This is by increasing resilience and mitigation measures. The Insurance Council of Australia stated that:
Targeting climate change is the single greatest solution to home insurance affordability for households most impacted by increasing natural peril risks.
Final comments
4.58The committee notes that the legislation for the pool was developed by the former Government in the previous Parliament. In view of evidence given during the inquiry, the committee considers it premature to recommend significant changes to the pool now or to commit additional resources to its development, until such time as all the necessary insurers have joined the pool.
4.59Such changes could also lead to further delays in benefits being passed on to policy-holders in Northern Australia, as insurers may need time to implement the changes in their systems. Given the key issue identified in this inquiry was delays in insurers joining the pool, recommending considerable change now would be counterproductive.
4.60Even with the expansion by one insurer into new postcodes, issues with the affordability of cyclone insurance in Northern Australia remain unresolved—in short, the problem of insurance affordability has not gone away.
4.61As such, the committee intends to consider the operation and implementation of the pool in 2024 once major insurers have joined, and small insurers have begun the work to transition their reinsurance programs over.
4.62The aim of the pool is to reduce premium costs for policy-holders. The committee supports changes if government policy is not meeting its objectives. However, in this instance, the policy is not yet meeting its policy objectives because it is not fully implemented—most insurers are yet to join the pool. Whether the design of the pool is faulty, which would necessitate policy changes, cannot yet be determined based on the available evidence.
4.63The same goes for expanding pool coverage to other natural disasters, such as flooding, or expanding its geographical coverage. It is simply too soon to determine whether the pool is working effectively to reduce premiums related to cyclones in Northern Australia, let alone other areas.
4.64The committee notes that the ACCC previously 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. This issue could be revisited in future reviews once all relevant insurers have joined the pool.
4.65The committee notes that a review of the legislation is scheduled to report after 1 July 2025, by which time all relevant insurers will have joined the pool. These future reviews, as outlined in this concluding chapter, should consider the issues raised in this report, including whether the pool as designed in the legislation is meeting its core policy objectives.
4.66The committee considers that the review timeframe itself is appropriate given the legislation only requires major insurers to join the pool by the end of 2023 and small insurers by the end of 2024.
4.67Finally, the committee wishes to extend a word to individuals, families and businesses suffering through record-high insurance premium costs. Implementing government policy unfortunately takes time; determining whether it is effective takes even longer. The issue of insurance affordability in Northern Australia remains a key concern for this committee and its members.
4.68The committee is committed to recommending reforms to improve conditions for people living in Northern Australia where existing government policy is failing or there are gaps.
Marion Scrymgour MP
Chair