We’ve rounded up the latest developments on the Cyclone Reinsurance Pool, which officially commenced on 1 July 2022. For a detailed overview of the Pool, check out our introductory Insights Article here.
Premium savings from the pool
Speculation on the anticipated premium savings for policies captured by the Pool has re-enlivened, with the recent release of financial modelling suggesting the savings may be less than expected. During the consultation period, it was predicted that homeowners would benefit from up to a 46% premium discount, strata properties up to a 58% discount and SMEs up to a 34% discount1.
The newly-released modelling now suggests that those savings are likely to be closer to 19% for homeowners and 15% for strata2. Assistant Treasurer Stephen Jones MP indicated when releasing the financial modelling that complete transparency on the issue is necessary. In a media release, Mr Jones stated that “some communities could actually see their premiums rise”.
The Insurance Council of Australia also released its own comments on the modelling data, with Chief Executive Mr Andrew Hall stating that:
"We welcome the Assistant Treasurer’s move today to bring full transparency to the modelling which sits behind the Reinsurance Pool scheme. Insurers have been concerned that consumer expectations around premium decreases were never going to be met through this scheme, so today’s release has provided transparency for the first time..."3.
Ongoing criticism has been levelled at the former government for failing to release the modelling prior to the 1 July 2022 start date. Nevertheless, with the transition period for the Pool now underway, updated data can be analysed on larger sample sizes to better understand the true costs savings for policyholders, and how the Pool is impacting upon the Northern Australian communities in need of the premium relief. There remains a level of certainty that the Pool will deliver discernible costs-savings, if only because it delivers a product without capital margins, and with more stability across market fluctuations.
Given larger insurers are not required to be fully compliant with the Pool until the end of 2023, and smaller insurers by the end of 2024, the ACCC’s annual reporting in these calendar years will give a graduated indication as to whether preliminary expectations are being met.
Expansion of the pool to cover more risks
As currently formulated, the Pool is estimated to cover some $2.6 trillion insured value of homes, SME businesses and strata policies exposed to cyclone risk. The target premium pool is $867 million, comprising approximately 3.3 million eligible residential home policies, some 220,000 small business policies and approximately 140,000 residential and small commercial strata policies4.
Following from ongoing flooding events, calls were made for the Pool to expand to include a broader range of flood cover (among other things). Such proposals were rejected at the time the legislation was passed due to concerns about delays to the commencement date, but the Labor government has previously indicated a willingness to consider the expansion of the Pool during the statutory review process.5
It remains to be seen, noting that New South Wales is again in the midst of further flooding events, whether steps are taken to actively consult on the potential broadening of the scheme. Preliminary assessment on the impact of the scheme, as currently formulated, will be critical in determining whether expansion is a viable option and the parameters of any proposed amendments.
A strong call for insurers to act quickly
Despite the established transition period over the next 18 months for large insurers6, there is mounting community and political pressure on insurers to engage with the Pool now, and pass on the associated costs savings to its policyholders immediately.
Federal member for Herbert, Mr Phillip Thompson MP issued a media release on 30 June 2022 calling upon insurers to “ease premium pressure now”,7 indicating that he had already written to the large insurers urging them to pass on the premium savings and to “stop price gouging”. He goes on to urge insurers to “do the right thing” and pass on the premium price savings effective 1 July 2022.
APRA ancillary updates
On 29 June 2022, APRA finalised amendments to the prudential framework for general insurers to support the operation of the Pool. It released a statement on the same day, advising that the Australian Reinsurance Pool Corporation (ARPC) is now recognised as an APRA-authorised reinsurer.
Investment in resilience
The longer-term focus on improving resilience of the communities impacted by cyclone risks continues to be an important factor in the broader strategy for managing these events.
ARPC has now published its initial premium rates, along with the reinsurance agreement. However, the consultation period for the initial premium rates has been extended until 31 July 2022, with the revised rates to be published in October 2022. The ARPC acknowledges that consultation with industry in establishing these initial premium rates was limited both in time, and availability of data, necessitating an expansion of the consultation period.
ARPC has provided premium discounts for properties built to higher standards of cyclone resilience. For older properties, there are incentives in the initial premium to encourage the retro-fitting of resilience features, such as stronger garage doors, roofs and windows. ARPC states that:
“The risk of the building is recognised by risk factors. For example, older buildings will have higher premiums. An older building retrofitted to current building standards will have a similar premium to a newly-built one.”8
This position is reflected in the initial premium rates recently published:
Reinsurance premium paid by the insurer
Constructed after 1981
Constructed before 1981
Constructed before 1981 but fully mitigated
Where to from here?
There will be ongoing modelling and revision required in the coming months as insurers, particularly larger insurers, complete the transition process. This is likely to inform future debate on any expansion of the Pool to cover a broader range of risks.
In the meantime, we await details of the ARPC revised initial premium rates, due to be released in October 2022.
1See the Morrison government’s statement on these estimated savings here.
2It’s important to note here that the modelling was limited by various factors, including data largely dominated by Qld home policies, a lack of consistency across the 5 insurers in how data was reported, the provision of data on cyclone risks only, and a complete lack of data provided on flood risks.
3See the full media release from the Insurance Council of Australia here.
4See the ARPC Industry report.
5Per comments from Senator Jenny McAllister to parliament on 29 March 2022.
6Smaller insurers have until the end of 2024 to transition to the Pool.
7You can read the full media release here.
8See the report here.