Will the Government’s reinsurance pool win votes and meet expectations?

After years of debate over the need for a catastrophe reinsurance pool, the Government has finalised the design of the reinsurance pool for cyclone and related flood damage in northern Australia, due to take effect from 1 July 2022.

While it’s a significant milestone, it’s missing critical pricing and modelling details, so questions remain over how well it will work, or if it will work at all.

What we know 

• It’ll be administered by the ARPC. 

• It’s backed by a $10 billion annually reinstated Commonwealth guarantee. 

• Over 880,000 residential, strata and small business property insurance policies in northern Australia should be eligible. 

• Forecasts suggest insurance premiums will reduce by up to $2.9 billion over 10 years. 

• Homeowners with the most severe cost pressures should benefit from premium discounts of up to 46%, strata properties up to 58% and small businesses up to 34%.

The pricing conundrum

What’s still unknown is the cost to insurance companies, who are legally required to join the pool. The Australian Reinsurance Pool Corporation (ARPC) and insurers must now work together to fully understand the impact on premiums.

However, Capital Innovation Insurance Group Queensland, believes it will take at least six months for insurers to build the reinsurance pool into their pricing once they have the details, potentially putting the 1 July start date at risk.

More reassuring news, however, is that the Australian Competition and Consumer Commission (ACCC) will have a budget of $15.4 million to monitor whether savings from the reinsurance pool are being passed onto consumers over the next four years.

What the industry thinks

The Insurance Council of Australia (ICA) has welcomed the release of the final design but reiterates that reducing the cost of reinsurance is only one step towards improving the affordability and availability of insurance for those in northern Australia.

It’s a view echoed by local insurers and brokers who are concerned about the limitations of the pool, the lack of clarity around how it will work with existing reinsurance programs, and the absence of cover for monsoonal storm damage or flooding caused by former cyclones in the scheme.

Pricing also remains a challenge with genuine fears that if the APRC doesn’t get its modelling right, prices may go up, doing little to help those policyholders already experiencing premium increases of up to 200% or strata properties that are forced to accept $200,000 cyclone excesses.

But persistence does pay off. The Northern Australian Insurance Lobby (NAIL) has led a 10-year campaign for fit-for -purpose insurance for northern Australians. Addressing worries about the pool only covering commercial properties with up to $5 million sums insured, NAIL has secured a commitment from the Government that its initial 12-month review of the scheme will review strata accommodation models, small marine business property and residential home care.

ICA CEO Andrew Hall has commented, “To provide long-term sustainable reductions in premiums Australian governments – both state and federal – need to invest in stronger homes and infrastructure that makes communities more resilient to worsening extreme weather.

Furthermore, we must also improve resilience standards in building codes, remove state insurance stamp duties and levies, and make better land planning decisions that factor in worsening extreme weather and its impacts.”

No more political games

2022 is an election year, and the Strata Community Association has called for the legislation to be passed by Parliament swiftly to end the uncertainty. There are valid fears this could become a political battleground in the lead up to the election.

However, the ICA believes politicians now more than ever realise the need to invest in natural disaster mitigation, with a noticeable change in the conversation around how proactive investment in mitigation can reduce the impact of natural disasters on communities.

A way to go

We all know climate change is increasing the frequency and intensity of natural disasters but in Australia, it’s a problem that stretches more broadly than just cyclones in the far north. A recent report by the Intergovernmental Panel on Climate Change concedes Australia “faces an extremely challenging future that will be highly disruptive for many human and natural systems”. Worsening droughts, bushfires and floods like those just experienced in Queensland and NSW, will become even more severe and frequent as climate change takes hold.

There will be many watchful eyes on this scheme, with the primary measures of success being better availability and affordability of insurance cover. If the scheme achieves its goal and produces savings, there will be immense pressure for it to be extended further or modified to improve the benefits for everyone affected.

We believe the Government’s initiative and scheme concept is a positive step, and we look forward to seeing how it will change the lives and livelihoods of impacted communities and businesses.