On Thursday, 24 March, the Senate Standing Committee on Economics reported on the Treasury Laws Amendment (Cyclone and Flood Damage Reinsurance Pool) Bill 2022, recommending that the bill pass.
The Cyclone Reinsurance Pool has gained significant exposure in recent weeks, with calls for it to expand into flood and other risks, following the devastating flooding in Queensland and New South Wales during February / March 2022. Here’s a snapshot of where the draft legislation sits, noting Senate sittings resume this week.
Background
The bill provides the framework for the Australian Reinsurance Pool Corporation (ARPC) to implement a cyclone and related flood damage reinsurance pool (“the Pool”) for the purpose of improving insurance access and affordability for households and small businesses in cyclone-prone areas of Australia1. The Pool is intended to operate from 1 July 2022.
The Pool was first announced on 4 May 2021, following extensive inquiries into the escalating cost of insurance in cyclone-prone regions2. The extraordinary pressures placed on individuals, businesses, and social / welfare support systems because of poor insurance availability and under-insurance in these regions is extensive, significantly extending recovery periods for these communities.
The Pool will operate as a cheaper alternative to the private market for insurers to source reinsurance in these areas. Large insurers will have until 31 December 2023 to join the scheme and to enter into reinsurance agreements with ARPC for all eligible policies. Small insurers will have until 31 December 2024.
Over 880,000 residential, strata and small business property insurance policies are expected to be eligible to be covered by the Pool for the risk of cyclone and related flood damage including wind, rain, rainwater, rainwater run-off, storm surge, and riverine flood damage caused by a cyclone.
The Bureau of Meteorology (BOM) will be responsible for reporting to ARPC the start and end of a cyclone event, with the declaration of a cyclone event defining the claim period for the Pool, including the 48-hour period after the cyclone event ends (i.e. is downgraded to a low) when flooding and wind-related damage may still occur. Queensland Treasury pointed out in their submission that the ’48 hour’ addition after the cyclone downgrade may not be sufficient, noting for example Cyclone Oswald in 2013 resulted in significant flooding extending for 7 days. Ultimately, this definition of cyclone event remained unchanged after submissions but the differing views on this issue were certainly acknowledged by the Committee3.
How will the insurance industry be affected?
The Pool is touted to reduce insurance premiums by up to $2.9 billion for eligible households, strata and small business insurance policies over 10 years. Homeowners are predicted to benefit from up to 46% premium discount, strata properties up to a 58% discount and SMEs up to a 34% discount4.
The pricing formula has yet to be fully disclosed, but the Pool is designed to operate cost-neutral to the government in the long-term. It will be backed by a $10 billion annually-reinstated Commonwealth guarantee, managed by ARPC. The guarantee can be drawn upon by ARPC if the estimated claims total exceeds the funds available in the Pool.
The ACCC will be responsible for monitoring the implementation of the Pool and ensuring that costs-savings are passed on to policyholders. Civil penalties will apply for insurers who are required to engage with the Pool, but fail to do so. The Pool will be subject to review by the ACCC 12 months after implementation, which has allayed some of the concerns made in submissions.
Submissions made and response
Submissions to the Committee were made by various key stakeholders in the industry, including the Insurance Council of Australia, RACQ, Property Council of Australia and the Strata Community Association, among others.
The National Insurance Brokers Association raised concerns that the policy objectives of the legislation will not be achieved in circumstances where there is not enough incentive for insurers who have exited the North Australian market to return. The submission notes that:
“Based on the current wording of the bill, general insurers who write cover for other types of risks in northern Australia but do not write cyclone risk, or who have ceased writing such risks by the date they are required to join the pool, are not required to participate.
NIBA notes that there is nothing preventing these insurers from gradually declining to renew existing cyclone exposed risks until eventually they are no longer required to participate…”
Strata Community Association noted in its submission that:
“For years we have heard consistently from our members, most particularly in Northern Australia, about the difficulties in obtaining and affording strata insurance and we welcome the action relating to the reinsurance pool…”. 5
And that:
“The persistent messaging from our members, stakeholders and industry professionals over the years is that the insurance situation in Northern Australia is untenable, as the growth rates of premiums continue to rise….”6
The Property Council of Australia noted in its submission that:
“The Property Council notes that under the legislation the reinsurance pool only covers commercial property polices with less than $5million total sum insured across risks covered by the pool.
We believe that larger businesses should not be excluded from eligibility where they own and operate assets on which communities rely during disaster events like cyclones and related flooding, such as shopping centres, and recommend that the draft legislation be amended accordingly.”7
The significant impact that severe weather events have on infrastructure and resources of local authorities in Northern parts of Australia is also notable. The North Queensland Regional Organisation of Councils, representing 5 member Councils in North Queensland, also made a formal submission to the senate committee, stating that:
“…Our long-term view regarding the reinsurance pool is that it should provide reinsurance for all severe weather events that take place in Northern Australia, including seasonal flooding, storm events, low pressure events, storm surges and droughts…”.
Common comments amongst the submissions more generally also related to the lack of modelling / data released (to date) backing the government’s calculations of estimated savings to consumers.
Senate committee report
The Senate Committee’s report recommended firmly that the legislation pass, stating that “the need to act now is vital”8. It comments that:
“Given the numerous reviews and inquiries in recent years which support action being taken, the committee is firmly of the view that the establishment of the reinsurance pool is crucial in ensuring that Australians in cyclone-prone areas have access to affordable insurance. The cost of insurance for people living in Northern Australia – an economic powerhouse which benefits the whole of Australia – is not sustainable. Action must be taken….”9
The committee otherwise acknowledged submissions addressing the length of the cyclone event, observing the attempt to strike an appropriate balance on the timing of the event with the viability of the scheme. It also appreciated the comments made about the lack of modelling data that has been released regarding the estimated costs savings, but was satisfied that Treasury had taken appropriate steps to analyse the core data.
Notable comments to the Inquiry include that of University of Melbourne Postdoctoral Fellow Dr Antonia Settle, who stated in verbal evidence to the committee:
… I want to draw attention to the fact that the unaffordability of insurance has rapidly become a national problem… I think we need a national policy that confronts this problem and manages a market shake-up in an orderly way. By addressing the insurance crisis through the provision of a blanket subsidy to the insurance market, the insurance pool clearly fails to do this… it needs to be much more forward looking, with an eye to growing geographical segregation between socio-economic groups…”
The comments made by Dr Settle reflect the current dynamic of the conversation on disaster management within Australia, and the calls for a national framework for dealing with natural disasters.
Potential further expansion into other natural disasters
According to the Insurance Council of Australia, estimated losses from the floods in Queensland / New South Wales over February & March 2022 have now exceeded $2 billion10. The commentary on the Pool is escalating, with calls by various political segments for it to be expanded to cover other natural disasters, including floods and fires.
With the 1 July 2022 start date looming, these issues cannot properly be ventilated in the coming weeks, without detrimentally affecting the Pool commencement date. What will become a live issue for consideration is how government and industry respond to these issues. No doubt commentary on subsidising the cost of living in higher risk-prone areas will charge political debate. Similarly, dialogue on the effects of climate change on the Australian environment, and the increased risk for extreme weather events will remain in focus.
It is notable that the bill is designed to ensure that properties conducting relevant mitigation strategies are incentivised with reduced premiums. This mitigation of cyclone and flood risks will not only benefit policyholders but will contribute to ongoing affordability of cover long-term. In its submission, Insurance Australia Group Limited cautioned that the consideration of mitigation measures should be carried out by ARPC in conjunction with the industry, noting in particular that mitigation of risk for both life and property is relevant11. The Local Government Association of Queensland has previously noted in its budget submissions that a targeted disaster mitigation program should be implemented, stating that “…ensuring infrastructure can withstand future climate-change realities is vital for creating prepared and resilient communities.”12 The level of engagement on these issues is yet to be clarified.
Where to from here?
Senate sessions resume this week.
1 Per the Explanatory memorandum
2 Including the Natural Disaster Insurance Review, the Northern Australia Insurance Premiums Taskforce, the Royal Commission into Natural Disaster Arrangements and the ACCC’s Northern Australian Insurance Inquiry.
3 See paragraph 2.7, page 20
4 See the Morrison Government’s statement on these estimated savings here.
5 Page 4, submission
6 Page 7, submission
7 Page 1, submission
8 See paragraph 2.81
9 Paragraph 2.77
10 See more here.
11 See their submission in full here.
12 See the ALGA Pre-budget submission here.
