The Australian Consumers Insurance Lobby (ACIL), a consumer advocacy group, has stressed the urgent need to address the disparity in insurance premiums between northern and southern Australia, advocating for a fairer and more equitable system.
This statement was made as part of a submission to the Australian Reinsurance Pool Corporation (ARPC) for the 2024 Cyclone Reinsurance Pool (the Pool) premium rates review.
Key points of the submission:
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Equitable Contributions: ACIL highlights the necessity for all regions, including those south of Port Macquarie, to contribute to the Cyclone Reinsurance Pool. Historical data from the University of Newcastle reveals that regions in New South Wales have experienced cyclone events but are not currently contributing to the Pool, demonstrating that the risk is not confined to the north.
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Fair Modelling: The current modelling for the Pool does not adequately consider the potential for future cyclone events in southern regions, leading to an unjust premium burden on Northern Australia residents. ACIL contends that private reinsurers would factor in cyclone risks for areas south of Port Macquarie, and the Pool should do the same
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Transparency in Rate Setting: To foster greater transparency, ACIL advocates for the disclosure of reinsurance costs on policy premium notices. This would enable consumers to understand the impact of the Pool on their premiums and hold insurers accountable for passing on savings.
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Proactive Mitigation Measures: ACIL supports pre-cyclone season roof inspections for strata buildings, which can significantly reduce claims and improve the Pool’s effectiveness. Discounts should be provided for buildings that comply with established inspection criteria.
Mr Tyrone Shandiman, ACIL chairperson, said, 'It is imperative that the Cyclone Reinsurance Pool operate on principles of fairness and equity. Residents in Northern Australia should not bear a disproportionate burden while southern regions contribute nothing. Our submission calls for a more balanced approach that ensures all Australians share the risk and benefits of cyclone insurance.'"
Challenges with the Cyclone Reinsurance Pool
According to the ACIL, the Pool, while in its early stages, has faced significant challenges that include:
Problematic Rollout: The initial rollout was problematic, with rushed legislation and hurried pool design. The Australian Reinsurance Pool Corporation (ARPC) released rates only weeks before the programme's start date on 1 July 2022, leaving insurers little time to incorporate the program into their reinsurance negotiations. Many insurers joined at the last minute in December 2023 and the pool's benefits remain unclear.
Poor Premium Modelling: The Pool covers all homes and commercial properties under A$5m ($3.3m) across Australia for cyclone. However, under the pool modelling, Northern regions (north of Port Macquarie on the East Coast) bear the funding burden. The programme fails to consider historical events like TC119, which hit Sydney in 1950, and does not account for potential future cyclones in areas without historical precedent.
Lack of Resilience and Mitigation: The Pool has not integrated a resilience and mitigation mandate, which would benefit Northern residents. While the Pool is a crucial step towards resolving the affordability crisis, the government has not addressed the initial rollout's shortcomings to ensure it benefits consumers. Recent ARPC data shows some savings for consumers, but not enough to comprehensively address affordability issues.
Eligibility: Certain properties are excluded from the Pool that ACIL believes should be included. These properties include marine risks, aged care facilities, farms, and strata properties with over 50% short-term accommodation. Excluding these categories leaves significant gaps in coverage, undermining the pool's effectiveness in addressing the affordability crisis comprehensively.
The ACIL cites the following considerations for effective reinsurance Pool design:
Land Use Planning Guidelines: Implement land use planning guidelines that support reducing claims. Restrict pool entry for new builds that do not meet these guidelines.
Mitigation and Resilience Integration: ACIL strongly advocates that the ARPC should be legislated to incorporate mitigation and resilience into the pool's design. A portion of the premiums collected should fund mitigation and resilience projects based on consumer cost-benefit analysis.
Building Standards: A catastrophe reinsurance pool should be complemented by improvements in building standards, which would make buildings more resilient and result in fewer claims. These improvements can be achieved either by updating existing building standards to enhance resilience or by establishing specific standards that properties must meet to be eligible for the reinsurance pool. In such a scenario, buyers must be informed if a property does not meet the eligibility criteria for the reinsurance pool when purchasing.
Political Impact Softening: Introduce the programme during a softening market cycle and phase in rate changes over a 3-5 year period. This approach can help avoid political backlash associated with abrupt premium alterations.
Private Reinsurance Integration: Explore a model similar to CTP (Compulsory Third Party) and WorkCover, where the government sets reinsurance rates but the private market participates in the scheme. This could enhance competition and efficiency.
Single vs. Multiple Reinsurance Programmes: Assess whether it is more affordable for consumers if insurers need to purchase additional reinsurance on global markets due to a limited reinsurance program. Consider if a single reinsurance policy for consumers is more beneficial, and consult with insurers to determine the best approach.
State and Federal Collaboration: The federal government should lobby state governments to reduce stamp duty or levies at the time of implementation. This collaboration can assist with the integration of the reinsurance pool and make it more affordable for consumers