Blowing in the wind

The ACCC has completed its longrunning inquiry into insurance problems in Australia’s north, but critics say the regulator has missed the mark

By Wendy Pugh

After three years, two interim reports and more than 420 submissions, the Australian Competition and Consumer Commission’s (ACCC) Northern Australia Insurance Inquiry has delivered proposals that include the sensible, the controversial, the often-repeated and the long-ignored.

The Insurance Council of Australia (ICA) says it’s encouraged by the findings, the National Insurance Brokers Association (NIBA) says it’s concerned, and Townsville Mayor Jenny Hill says it’s disappointing.

ACCC Deputy Chairman Delia Rickard says the inquiry examined insurance in Australia’s north in unprecedented detail and the group’s regulatory powers and approach meant the review was “fundamentally different” to previous investigations.

“Our analysis has shown that, with the right actions, northern Australian insurance markets could work much better for consumers,” she says. “We believe our wide-ranging recommendations would address many of the problems we have identified.”

The Hayne and natural disaster royal commissions recently touched on some of the same territory, while a Senate committee, the Productivity Commission and the Northern Australian Premium Taskforce are among others that have taken a look.

The ACCC says it was able to obtain a “significant volume” of detailed information from insurers and intermediaries that was not provided to other inquiries, and it brought expertise in competition, regulation and consumer protection to the task.

The long-running inquiry was announced in 2017 by former Treasurer Scott Morrison a few months after Cyclone Debbie hit the Queensland coast, and since then further catastrophes and other insurance market issues have intensified calls for action.

Historic floods hit Townsville in early 2019, the Black Summer bushfires burnt swathes of eastern Australia last summer and a hardening market has elevated concerns wherever risks are high, causing the Australian Small Business and Family Enterprise Ombudsman to launch its own review.

Assistant Treasurer Michael Sukkar requested a separate examination of reinsurance pools after the Townsville floods, despite the idea having failed previously to gain political traction and with the ACCC inquiry continuing.

The ACCC’s 560-page final report makes 38 recommendations, with three specifically directed at addressing immediate affordability concerns. The final document adds 11 new proposals to 27 brought through from interim reports.

The inquiry opposed a reinsurance pool in its 2019 second interim report and the final version confirms that view, while adding a specific recommendation that if governments really want to intervene they should instead consider direct subsidies based on premium level and income eligibility.

It says subsidies have greater potential to deliver targeted relief, while government-backed pools are best suited when insurance or reinsurance aren’t otherwise available, and there’s no failure in that regard in Australia’s north.

“Private insurance markets continue to supply insurance, including for cyclone and flood risks,” it says. “As such, government insurers and reinsurance pools cannot be justified on the basis of availability concerns.”

Insurers generally oppose a reinsurance pool, although Allianz is supportive, while local governments in Queensland are continuing to campaign in favour. Insurers have also said that direct subsidies to consumers would mask risk signals and don’t make lasting improvements.

The report’s proposals for governments to remove insurance stamp duties, or at least rebase them and direct revenues to mitigation or affordability, are widely supported, but decisions on that remain in the hands of states and territory governments which have been reluctant to release their grip on such a reliable source of revenue.

Besides affordability, the ACCC recommendations are grouped under these headings:

• Making it easier to search for and compare insurance products;

• Choosing the right amount of cover;

• Dealing with conflicts of interest;

• Improving consumers’ rights; and

• Reducing risk and building better.

The regulator reiterates its call to ban broker commissions – which it refers to as “conflicted remuneration”.

It says it looks forward to participating in a review flowing from the Hayne royal commission that will report next year on the issue.

NIBA questions the ACCC’s views on availability, with Chief Executive Dallas Booth saying the regulator’s proposal on commissions will do nothing to address the problems the inquiry was set up to investigate.

“I’m concerned that a lot of this report was prepared on the basis of technical analysis of data rather than full engagement with people on the ground familiar with the issues and challenges on a day-to-day basis,” he told Insurance News.

“They say there is plenty of reinsurance cover available for the market and they also say there are eight insurers providing cover into northern Australia. Our members are absolutely adamant that they are very lucky to get two quotes, and most of the time they struggle to get two quotes.”

Strata Community Association (SCA) also takes issue with the ACCC over availability and opposes a proposal for dwelling managers placing cover to be remunerated by body corporates only.

“There are currently a number of different ways that managers get remunerated, but at the end of the day if the current situation is changed the result is going to end up in a higher cost to the consumer,” SCA President Andrew Chambers told Insurance News. “Because, simply, somebody has to pay for the managers to do this work.”

Mr Chambers says legislated compulsory strata insurance must be reviewed as owners fear being left without cover for other hazards, such as fire, as insurers avoid cyclone risk.

“There is a market failure, because we are aware through some of our members in north Queensland that a number of them have strata properties that simply cannot get insurance,” he says.

The ACCC contends a comparison website may reduce barriers to entry for insurers and help consumers shop around, and proposes the Government consider a national home insurance site, which would also be more effective if standard cover and standardised definitions were introduced.

Insurers have long opposed a comparator, and Allianz Chief Corporate Affairs Officer Nicholas Scofield says it could worsen northern Australia’s problems.

The inquiry says insurers may raise premiums to avoid new customers in high-risk areas as they manage their exposures and reinsurance costs, but Mr Scofield says the regulator fails to see that, as a result, a comparison site may spur higher prices.

“Insurance is not like other goods and services,” he said. “If you don’t take account of that, you are likely to come up with proposals that give you quite counter-intuitive outcomes.

“It is arguable that the unique market dynamic that you get in this sort of context is something that bamboozled the ACCC.”

Mitigation is supported generally in the report, but the regulator doesn’t see it as an immediate affordability solution and wants premium pricing more explicitly and transparently linked to actions taken by governments and households to boost resilience.

It wants insurers to estimate premium benefits for government mitigation projects, and report on actual impacts, while consumers should be told actual and possible price reductions from home improvements.

“The absence of robust systems to clearly adjust premiums in response to mitigation works undertaken will undermine the incentive for residents and governments to invest in mitigation,” the ACCC says.

“While insurers often assess the cyclone or flood risk at an address level, a number of insurers currently do not have measures in place which allow them to take private mitigation activity into account.”

The inquiry looked closely at improving building standards and land-use planning in its final year – areas of focus welcomed by ICA, which has formed a working group with Master Builders Australia.

“The insurance industry is already working with resilience agencies, scientists, local government and the building sector to develop above-code standards for homes and commercial properties,” Chief Executive Andrew Hall says.

The Financial Rights Legal Centre, which assisted more than 120 people after the Black Summer bushfires and more than 375 others affected by other natural disasters in the past 12 months, backs the ACCC’s broad recommendations, including its subsidies proposal.

“The Australian Government must intervene to ensure that insurance for Australians at risk of experiencing bushfires or other natural hazards is affordable,” Director of Casework Alexandra Kelly says.

“We support the ACCC’s conclusion that direct subsidies have the greatest potential to work in a targeted way to relieve some of the acute affordability and cost of living pressures facing consumers in higher-risk areas.”

The ACCC anticipates many of its proposals will benefit consumers across the country, but the inquiry’s mandate highlights the enormity of the challenges in northern Australia and the reality of its extreme weather risks.

Average home insurance premiums in the north rose by 178% from 2007/08 to 2018/19, compared to a 52% increase in the rest of Australia. The average premium was around $1900 in the region at the end of the period, which is around double the rest of the country.

Suncorp Chief Executive Insurance Product & Portfolio Lisa Harrison told Insurance News the three-year inquiry once again confirms the risk of frequent and severe natural disasters is the main driver for the higher premiums.

“Climate change will increase this risk, so the focus needs to be on policy action,” she says. “Insurers must do our part to improve affordability but we cannot do it without governments and homeowners helping tackle the root causes.”

The Greater Whitsunday Alliance, a regional economic development group, says the report doesn’t go far enough in addressing the lack of competition in the market and, despite the ACCC’s rejection, maintains a reinsurance pool would go a significant way to improving the situation.

“We also need the Queensland Government to examine the significant stamp duty ‘windfall’ they receive from increasing insurance premiums, and pressure needs to be applied to address this issue immediately,” alliance Chief Executive Kylie Porter told Insurance News.

In Townsville, Cr Hill also supports a reinsurance pool and says the lengthy ACCC report has failed to address the fundamentals around insurance pricing in the region.

“When I have spoken to others there is a general view that it was a waste of time, because there doesn’t seem to be anything in there that no-one really knew,” she says.

“The ACCC took three years to complete its investigation into insurance in Northern Australia and over that time the situation has further deteriorated.”

For small businesses, ‘extreme consequences’ are looming

While not focused on northern Australian consumers, a separate inquiry into insurance in the second half of last year explored some of the same issues as the ACCC’s investigation and called for strong action to tackle a worsening crisis.

Australian Small Business and Family Enterprise Ombudsman Kate Carnell began the inquiry after receiving complaints about soaring premiums and difficulty obtaining cover following natural catastrophes and as insurers’ risk appetites dipped in response to falling earnings.

Ms Carnell says the inquiry, which released its findings about a week after the ACCC document was delivered to Treasurer Josh Frydenberg, heard from hundreds of small businesses facing closure because they couldn’t secure insurance.

“The insurance market is opaque and small businesses desperately need help navigating it,” she said. “There is market failure that will have extreme consequences for the Australian economy if left unaddressed.”

Contrary to the ACCC’s views, the ombudsman recommends expanding the Australian Reinsurance Pool Corporation to provide reinsurance for all natural disasters for commercial property as risks from events such as cyclones, bushfires and hailstorms continue to rise.

“This is not an issue that impacts only one industry or that can be mitigated by individual businesses,” Ms Carnell says. “The local pub cannot control the weather.”

The ombudsman says that as authorities approve new development in local areas and release land, natural peril assessments for 1-in-100-year risks should be published.

“Where land is released with known issues that are not disclosed to a purchaser or are otherwise not apparent, the relevant authority should carry the liability for the known issue in perpetuity,” the report says.

Issues looked at in the report also include the availability of public liability and professional indemnity insurance, disclosure, claims experience and barriers to switching and market entry. Like the ACCC the ombudsman calls for “conflicted remuneration” for insurance brokers to be banned with a phased transition period.

Ms Carnell says climate change impacts are likely to increase over time, affecting a greater number of businesses, and governments need to become more involved in finding solutions.

“We are going to end up with more climate events, not fewer,” she says. “So, are we planning to tell everybody in the bushfire-affected areas, or north Queensland, to move?

“I don’t think that’s going to be a terribly politically palatable approach. The fact is, it is a problem. It needs to be fixed.”