Making a splash in north Queensland

Making a splash in north Queensland

After a decade of reinsurance pool suggestions and little focus on mitigation, the Federal Government has leaped into action on both fronts

By Wendy Pugh

Federal Treasury will need a very large table to seat all those who want to hammer out the details for a cyclone reinsurance pool backed by a $10 billion government guarantee that is intended to take effect in July next year.

After a decade of successive federal governments circling the idea and insurers resisting the proposal, a reinsurance pool was announced on May 4 by Prime Minister Scott Morrison in a sweep through north Queensland ahead of the Federal Budget.

The focus now turns to its design and operation, and parties well-versed in the debate – particularly insurers – are anxious to be part of the process.

Long-time campaigner and co-chair of the new Northern Australian Insurance Lobby Margaret Shaw also says the voice of consumers mustn’t be ignored as the arrangements are put in place.

“We want to know what the details are and help to inform them if we possibly can,” she told Insurance News. “I think we have one opportunity to get this right – and we want to get it right, right from the start.”

National consumer groups, insurers, brokers, reinsurers, strata representatives and business organisations are among those set to put forward their perspectives during a relatively rapid consultation period mounted by a Treasury-led taskforce.

Insurance Council of Australia (ICA) Chief Executive Andrew Hall says the insurers are looking forward to working with the Government and other stakeholders on the design and implementation of the pool, while Allianz, a long-term supporter of the pool concept, has welcomed the initiative.

“At a high level it is obviously very much consistent with the mechanism we have been advocating for, but you can see from the announcement that there is an enormous amount of work to be done in designing exactly how it will work,” Allianz Australia Chief Corporate Affairs Officer Nicholas Scofield says.

The pool, aimed at cyclone and related flood damage affecting residential, strata and small business properties, will be funded via reinsurance premiums paid by insurers, and is intended to be cost-neutral to the Government over time.

It also aims to foster greater competition in a market that has seen a marked withdrawal of capacity.

The announcement flags the potential to reduce premiums by more than $1.5 billion over 10 years, and says more than 500,000 insurance policies in northern Australia are expected to be eligible for cover.

Finity Principal Rade Musulin says the final form of the pool will be critical in achieving the ambitions, but the Government has the benefit of expertise within the Australian Reinsurance Pool Corporation, which will administer the scheme. Overseas versions – both good and bad – can also be considered.

“It’s certainly possible to design pools that break even,” he says. “There are examples of this all over the world, but there are other examples where pools have lost money.”

A Treasury consultation paper outlines the broad starting position and poses 23 questions on issues to be resolved before the pool can commence next year.

It will be designed to provide a reduced reinsurance premium based on properties’ risk profiles, with higher-risk properties receiving higher discounts.

All too common: cyclones and floods have led to rising premiums in the north

Savings to insurers are expected to result from lower reinsurance rates compared with the private market, as the pool will forgo a commercial profit margin. The government guarantee means premium levels won’t need to be high enough to ensure enough cash is on hand for rare events such as 1-in-100 year cyclones.

Basic details to be determined through the consultation include how to define cyclone and cyclone-related flooding for the purposes of the reinsurance coverage.

Suggestions include nominating flood damage that happens within a fixed proximity and time of a cyclone, or a measurement of the amount of rainfall brought by a cyclone that has not dissipated when flood damage occurs.

A definition for small business also needs to be agreed – given there’s more than one currently – while separately insuring SME property creates its own issues when policies are sold as packages covering a range of commercial risks.

The Treasury paper asks whether insurer participation should be mandatory and how much risk should be ceded to the pool. Feedback is sought on possible price monitoring, to make sure savings are passed through to policyholders, and it suggests an agency such as the Australian Competition and Consumer Commission (ACCC) could be considered for the task.

Ensuring a smooth transition to the pool is highlighted as an important consideration for the efficient functioning of the insurance market.

Options put forward include allowing insurers to keep current reinsurance arrangements until they expire, or for the Government to set a date by which insurers must exit existing contracts.

Whether the pool should have an exit date, which is the case with the UK’s Flood Re, is part of the discussion, along with questions on how the arrangements could encourage mitigation and avoid unintended repercussions.

“By reducing reinsurance costs for highrisk properties, there is a risk that the reinsurance pool may encourage new construction in high-risk areas or to a standard that is vulnerable to cyclones and related flood damage,” the Treasury paper says. “The taskforce will consider options to address this, such as limiting eligibility.”

The consultation paper also flags potential links to the issue of state and territory insurance taxes, noting the Royal Commission into National Natural Disaster Arrangements highlighted that multiple inquiries have recommended the abolition or reduction of such taxes to lower premiums.

Settings that could be included in the design of the pool, or policy options introduced alongside to encourage further action by states and territories on insurance affordability, will be considered.

Insurers – putting aside their previous opposition to a pool to accentuate the positives – note the reinsurance pool announcement should be seen in the context of a broader Budget boost in resilience spending, which they have long prioritised as the best long-term solution to northern Australia’s insurance affordability and availability problems.

The Budget allocated $600 million for a disaster preparation and mitigation program to be managed by a new National Recovery and Resilience Agency. Projects will include bushfire and cyclone-proofing of homes, levee building and shoring-up of telecommunications.

A pilot program to fund strata property cyclone risk mitigation in north Queensland, to be implemented with the state government, will receive $40.3 million over three years.

ICA says the resilience initiatives are an “historic first step” toward redressing an imbalance that has seen 97% of disaster funding spent after an event, while just 3% is spent on mitigation measures.

But there are critics of the pool scheme’s focus on north Queensland, where the governing Federal Coalition holds a number of crucial electoral seats.

They point out that natural disasters affect much of Australia, and while the resilience measures are broadly aimed, the pool has a narrow remit.

The Australian Small Business and Family Enterprise Ombudsman last year called for a pool that would cover natural disaster risks across the country. Consumer groups have also highlighted the Black Summer bushfire impacts and have suggested targeted direct subsidies may be a more effective form of government action.

The potential for a reinsurance pool has been studied by the 2011 Natural Disaster Insurance Review, the 2015 Northern Australia Insurance Premiums Taskforce, and the recent three-year ACCC Northern Australia Insurance Inquiry.

Affordability issues in north Queensland gathered steam after Cyclone Yasi and catastrophic flooding in 2011, then gained momentum following Cyclone Debbie in 2017. They were further fuelled by the 2019 Townsville floods, which led to yet another examination of the reinsurance pool concept.

The ACCC inquiry found the average combined home and contents insurance premium in 2018-19 was about $2500 in northern Australia, compared to about $1400 for the rest of the country.

Griffith University political commentator Paul Williams says Mr Morrison’s reinsurance pool announcements are in a context where Queensland, especially outside the southeast, remains a key battleground in the run-up to the next election.

Queensland swung to the Coalition at four times the national average in 2019, and with a one-seat majority in Parliament it must do equally well in regional areas at the next election, which is due by late May next year.

“Natural disasters hit regional Queensland disproportionately hard, and this sort of intervention by Morrison – seemingly the new way of a coalition abandoning neo-liberalism – may tip the balance,” Dr Williams tells Insurance News.

The seat of Herbert, which includes Townsville, flipped to the Coalition from Labor at the last election with an 8% swing on a two-party preferred basis.

Coalition MP for Herbert Phillip Thompson says one of the biggest issues raised with him is the sky-high cost of insurance. He claims there has been a market failure in the provision of something that’s an essential service.

“If you want to own a house, a business or a strata, you must have insurance,” he told Parliament. “It’s as essential as water and electricity. This reinsurance pool will take a lot of the risk from the insurer, which will mean cheaper premiums for the people of Townsville.”

Strata Community Association (SCA) President Andrew Chambers says his members are among those seeking an active role in the process to ensure benefits are delivered.

“Hopefully, SCA can get a seat at the table because we have been working on the northern insurance issues for a long time over the years,” he says. “We have got a lot of information and a lot of experience that we could contribute.”

Treasury says once feedback on its paper is received and further consultation methods completed, the taskforce, drawing on assistance from relevant government agencies, will develop advice for Government consideration. The coming months shape as a critical time in determining the results that will be achieved.

“It is all going to be down to the design of the pool, in terms of how much effect it might have on premiums and whether it does in fact make it attractive for others to enter the market,” former ICA executive Karl Sullivan says. “The devil will be in the detail and the architecture.”