Fishing for conclusions from swirling pool debate

A federal parliamentary committee inquiry hearing ran all day on Friday, investigating the operation and implementation of the government’s new cyclone reinsurance pool.

The range of views expressed was at times overwhelming – but insuranceNEWS.com.au steps back from the fray and tries to draw some conclusions on the much-talked-about scheme.

You can watch Friday’s hearing here.

A communication catastrophe

The way the pool was sold to consumers in the north created confusion and disappointment.

Due to the previous federal government’s pre-election messaging, many insureds expected savings to start when the scheme began on July 1.

Whereas, as everyone now knows, large insurers don’t need to join until the end of next year and there’s been no rush to get involved earlier – with Allianz the only company to confirm the date of its involvement.

Then there’s the issue of the level of savings. The previous government publicised “up to” figures, rather than averages, which were always going to raise expectations.

And even now the estimates have changed as better data rolls in.

One step forward, two steps back

There’s no doubt that the reinsurance pool will “work”. By foregoing profit margins and enabling insurers to access cheaper cyclone reinsurance, savings will be passed on to consumers.

Australian Reinsurance Pool Corporation CEO Chris Wallace told Friday’s hearing that he wants to make the scheme a success, and is confident he can do so. He correctly points out that the pool can bring stability by detaching from the currently rather unstable reinsurance market.

It’s just that the scale of the savings will still, in many cases, be dwarfed by the increases going through at every renewal, as insurers scramble to respond to the recent spate of natural catastrophe claims and the market remains hard.

As consumer advocate Margaret Shaw puts it in her submission – what use is a 10% reduction when set against a 500% increase?

The Insurance Council of Australia (ICA), in its submission, points out that even the cost of joining the complex scheme will work against it.

“The increased ongoing operational and frictional costs for complying with the pool will further impact the success of price reductions,” it writes.

Industry insiders believe there will be a small number of insureds that see really dramatic savings from the pool – but they will be few and far between.

Show us the money

The scheme is designed to be cost-neutral to the government over the long term.

That would be nice, but many have commented – on both the consumer and insurer side – that the only way to achieve the savings the people need is for the government to subsidise the scheme.

It can’t work alone

You have to wonder whether there might have been easier ways to achieve a short-term premium reduction (cutting insurance taxes), and more effective ways to have a longer-term impact (bringing down the risk through mitigation spending).

The industry, while welcoming the pool, has been politely reminding everyone of this the whole way through the process.

And while it’s made progress on mitigation spending, there are still outstanding concerns on taxes and land use planning.

Then there’s tackling the root cause of worsening nat cat events.

“We believe that targeting climate change is the single greatest solution to home insurance affordability for households most impacted by increasing natural peril risks,” the ICA writes.

Agreeing to disagree

There are lots of different ways the pool could be altered, and maybe improved. But the trouble is, not everyone agrees on the best way forward, not even within the insurance industry.

Should the 48 hour cut-off for cover be extended? Should the pool cover marine risks? Should those in the south of the country where cyclones cannot reach help subsidise those in the north? Should the pool be expanded beyond cyclone to include flood, or even all natural perils?

So many questions, and not a lot of answers. But as the Townsville Chamber of Commerce told the hearing, the fact that these things are even being discussed is a sign of progress.