ACCC cyclone pool baseline report shows premium pain

The Australian Competition and Consumer Commission (ACCC) has released its initial cyclone reinsurance pool monitoring report, setting a baseline for prices and costs ahead of insurers joining the scheme and highlighting price pressures facing northern regions.

The average premium for residential combined building and contents insurance in northern Australia was about $2370 last financial year, more than $1000 above the average across the rest of Australia, the report shows.

For strata the average premium in the north was about $5740, almost double the average of $2940 for the rest of Australia, while small business building and contents premiums averaged about $3160, compared to $1610 for the remainder of the country.

ACCC Commissioner Peter Crone says the first report provides a reference point to assess the actual impact of the pool on premiums and the savings it may generate for policyholders as insurers start to join.

Allianz is set to enter the pool with its householder portfolio in January, but the ACCC says many insurers appear likely to enter closer to the legislative deadlines, which are by the end of next year for large insurers and 12 months later for smaller providers.

“As insurers join the reinsurance pool, we will monitor market developments closely to assess the pool’s impact on reinsurance costs and other premium components, and the ultimate effect on the prices faced by policyholders,” Mr Crone said today.

“In our future reports, we will also examine broader insurance market issues, such as the number of insurers present in cyclone-prone regions.”

The report recognises challenges insurers face in joining the pool, which is being run by the Australian Reinsurance Pool Corporation (ARPC), including rearranging existing reinsurance and administrative changes.

A number of insurers have expressed concerns that the pool may increase the overall cost of their reinsurance, once they incur both the ARPC and non-ARPC components, while inflationary pressures are also an issue that could counteract cost reductions from the pool, given increased natural disasters, a nationwide building and construction boom and local demand shocks after catastrophes.

“The cumulative effect of this inflationary pressure appears to have been significant,” the report says. “For example, one insurer said that claims inflations in the market is approaching 15-20% annually.”

The report shows that over the long-term prices have been rising more quickly in northern Australia compared to the rest of the country.

Between 2007–08 and 2021–22, average residential combined home and contents insurance rose over 130% in northern Australia in real terms, compared to around 80% for the rest of Australia. Building only cover jumped more than 200% compared to around 120%.

The ACCC says net claims expense and reinsurance costs are the largest costs for insurers in all regions based on residential products analysed, accounting for about 75-85% of the cost to supply building and contents combined, and building-only insurance last financial year.

“While we are not yet able to measure the impacts of the pool on insurer costs, the introduction of the pool will likely affect these large cost categories faced by insurers for cyclone-related damage,” it says.