Cyclone pool details revealed, but questions remain

The Federal Government has moved at a fast clip to develop a cyclone reinsurance pool, after announcing in May that it would go ahead with the long-debated proposal, with draft legislation released last week providing details while leaving some key questions unanswered.

The two-week public consultation period on the draft bill closes on Friday next week, legislation will be introduced into Federal Parliament next year, ahead of an election due by late May, and the pool is set to commence from July.

The pool will cover cyclone and related flood damage for claims arising from the time a cyclone begins until 48 hours after it ends. Cover includes wind, rain, rainwater, rainwater run-off, storm surge, and riverine flood damage.

The Australian Reinsurance Pool Corporation (ARPC) will administer the scheme and declare an event based on Bureau of Meteorology advice. Initial announcements about the proposed pool had referred to a region above the Tropic of Capricorn, but the new material simply refers to “cyclones in Australia” including offshore territories such as Norfolk Island.

Household property, residential and mixed-use strata, small business, charity and not-for-profit property policies and farm residential policies will be eligible, with certain restrictions.

Business property policies would need to have sums insured of $5 million or less and strata and community title properties will be eligible where at least 80% of the total floor space of units are used mainly for residential purposes. Business marine cover remains a work in progress and is set to be included from the middle of 2023.

The pool will be mandatory and insurers are expected to start entering into agreements with the ARPC from July. Large insurers have until December 31 the following year to join the scheme, while small insurers have an additional 12 months to have all eligible risks reinsured with the scheme.

The pool will be funded by insurer premiums, with the scheme backed by a $10 billion annual Government guarantee, which can be increased after talks involving the Prime Minister, Treasurer and Finance Minister if rare cyclone activity levels draw down available funds.

Premiums determined by the ARPC won’t include a profit margin and will be subject to actuarial review. The pricing formula will be finalised before July and will use property-level data such as geography, building characteristics, and mitigation.

Treasury says key principles for the formula include that it should lower the reinsurance cost for most policies with medium-to-high exposure to cyclone risk and have minimal impact on premiums for lower cyclone-risk properties. It should also maintain incentives for risk reduction and offer discounts for properties that undertake mitigation.

The pool will cover all of the cost of eligible cyclone and related flood damage claims above the policyholder excess from July to June 30 2025 “to support insurer transition and maximise the potential premium reductions through the pool”.

From then, the pool will operate on a risk sharing arrangement with insurers, where the pool will continue to cover a significant proportion of eligible cyclone and related flood damage claims.

Insurers will continue to manage any claims and policyholders will still be able to choose their insurer.

“The scheme is expected to improve insurance access and affordability in cyclone-prone areas, build the financial capability of affected households and small businesses to recover from natural disasters, and support the economic resilience and development of cyclone-prone areas,” the Treasury papers say.

“The scheme is also expected to increase competition by encouraging greater insurer participation in cyclone-prone areas and support higher levels of insurance coverage by property owners.”

The Australian Competition and Consumer Commission will monitor pricing and the pass-through of savings achieved by the scheme. A first review is scheduled three years after it commences and every five years thereafter.

There is plenty of water to flow under the bridge before July, with critical issues around the setting of premium pricing still to be determined. Debate is continuing about the breadth of cover, while the expected level of savings for policyholders remains an unknown.

The draft legislation and further details are available here.