Northern Australia Reinsurance Pool for Cyclones and Related Flood Damage to commence from July 1 2022

The impact of cyclone and flood related damage on properties in Northern Australia over the past few decades has left in its wake issues pertaining to un-insurance, underinsurance, diminished insurer appetite, inflated premium and excess structures.

It is generally accepted that insurers will charge more to reimburse themselves for losses paid and in anticipation of future losses: particularly on “risk prone” classes of insurance. Notwithstanding this theory is causing insurance to become less affordable for policyholders. See our previous article on this topic here.

On 4 May 2021, the Australian Government announced its plan to introduce a reinsurance pool for cyclones and related flood damage. The scheme is designed to reduce the cost of reinsurance by providing affected households and small businesses with more affordable premium costs.

On 9 February 2022 the legislation for this scheme was introduced into the House of Representatives and was passed through the Senate on 30 March 2022.

The reinsurance pool will be established by 1 July 2022 and will be backed by a $10B, annually reinstated, Commonwealth Guarantee. Over 880,000 small businesses, residential and strata insurance policies will be eligible for this scheme.

The Federal Government has said the reinsurance pool will reduce insurance premiums in cyclone and related flood damage risk areas by:

  • 46 percent for households

  • 58 percent for strata properties

  • 34 percent for small businesses

The intention of the scheme is to encourage greater participation amongst insurers, thus increasing competition, and as a result, putting downward pressure on premiums.

It is further anticipated that there will be positive flow-on effects for larger commercial businesses and property owners. Insurers are restricted in the level of policy limit, or “capacity”, they are able to deploy in Northern Australia at any one time.  By freeing up capacity in the residential and small business sectors, it is expected that insurers and reinsurers will have additional capacity to deploy for larger commercial programs, thereby improving availability of cover and competition in this sector.

The Australian Competition and Consumer Commission (“ACCC”) has been enlisted to monitor prices and provide insight into how policyholders are receiving the benefits of the reinsurance pool. The Government will provide $15.4M over four years from 2021-22 to the ACCC to prepare and conduct the price monitoring. An additional $3.2M over the same period will be provided to the Treasury to establish, oversee, and evaluate the pool.

Large insurers are required to join the scheme, and have obtained reinsurance for all eligible cyclone risks, by 31 December 2023. Small insurers are held by the same terms but have until 31 December 2024.

Local Members of Parliament have requested the Federal Government extend the scheme to include northern New South Wales including Lismore, Ballina, and Byron Bay after the 2022 floods greatly impacted these areas. It was estimated that approximately 70 percent of the affected people in northern New South Wales were uninsured, others being quoted astronomical amounts for flood cover, up to $15,000 per annum.

Others however are calling for the Federal Government to expand the scheme nationwide, and to include floods, bushfires, and other natural disasters.

The Northern Australia Insurance Lobby (NAIL) has voiced its support of the legislation after several key recommendations it made based on previous draft legislation were incorporated. It does however note concerns for consumers who are not included in the reinsurance pool stating:

“It would be extremely disappointing if the insurance industry decided to only insure properties covered by the Federal Government reinsurance program, thus creating an even greater crises for buildings that are not eligible to be part of the proposed reinsurance program. This needs to be monitored.”

The Insurance Council of Australia (ICA) has welcomed the final plans for the scheme and the price monitoring to be undertaken by the ACCC. Further improvements to the Reinsurance Pool have been recommended relating to increasing investment in resilience measures to protect communities from extreme weather and the increased incidence of natural disaster in the region.

“We must also improve resilience standards in building codes, remove state insurance stamp duties and levies, and make better land planning decisions that factor in worsening extreme weather and its impacts.” ICA CEO Andrew Hall said.

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