Slow cyclone pool roll-out reflects complexities: insurers

Northern Australia cyclone reinsurance pool complexities are preventing insurers joining more quickly, while the Federal Government would need to consider subsidising the scheme if it wanted to deliver more significant savings for consumers, insurers have told a federal parliamentary committee inquiry.

Insurers say the Australian Reinsurance Pool Corporation (ARPC) cover has to fit around existing commercial arrangements, which need to be adjusted, while other systems changes are also required.

“It’s a very complicated scheme that’s being brought into effect and it’s being done relatively quickly,” Insurance Council of Australia CEO Andrew Hall told the committee. “The Flood Re insurance scheme for example in the UK took five years to come to fruition.”

New data collection and processes need to be put in place ahead of joining, with larger insurers given until the end of next year to place relevant risks into the pool, while smaller insurers have an additional 12 months.

“Setting all of that up is quite complicated and we want to get that right,” IAG EGM Product, Pricing and Governance Intermediated Insurance Christa Marjoribanks told the committee. “That’s why we can’t really rush into it, but we’re doing a huge amount of work.”

IAG and RACQ both told the committee they were likely to join the pool later next calendar year, Allianz confirmed that it would be joining from January 1, while QBE said it was currently working through pricing.

“We’ll be looking to conclude that work early in the new year, mindful that we need to be in well before the end of next year, so we expect to be progressively entering the pool throughout next year,” QBE Asia Pacific Chief Underwriting Officer Andrew Ziolkowski said.

Revised modelling recently released by the ARPC shows average savings in the highest risk areas of 32% for home and 13% for SMEs. Across Northern Australia it sees average savings of 13% for home, 10% for SME and 37% for strata, while across a broader area the savings are 6% for home.

The committee was told that inflation impacts and other rising costs affecting premiums complicate estimates of consumer benefits, and some not in the higher risk categories could see slight increases. Different modelling approaches may also have an impact for some households.

“Whereas we would currently price cyclone down to the individual property, one of the decisions that has been made within the ARPC modelling is to price at a suburb level which naturally creates an averaging effect,” Mr Ziolkowski said.

RACQ says Government modelling indicates less than 2% of homeowners in northern Australia may get a premium reduction of 32%, but more savings could be achieved if the requirement for “budget neutrality” is dropped.

Group Executive Insurance Trent Sayers says the Government should look at subsiding the pool, or direct subsidies to homeowners, with the amount of money required from the budget depending on the assistance targeted.

“We would need to work backwards from what [the government] wants to target in terms of either premium reductions or the average premium setting” he said.

RACQ is among insurers that have called for an extension of the cover period for cyclone-related flooding after a system is downgraded. The insurers are suggesting seven days, compared to the current 48 hours. But Allianz told the committee the existing cut-off should remain and extending it would further complicate the scheme.

Allianz says the amount ARPC is seeking to recoup from the industry reflects a long-term assessment of the annual average cost of the pool, while it pointed to the cost neutral requirement impact as a constraint on the expected level of benefit.

“The only thing that we would see that would materially change that would be the removal of the long-term fiscal constraint, and the addition of a subsidy into the pool,” Chief Corporate Affairs Officer Nicholas Scofield said.

Insurers also highlighted the importance of mitigation and resilience projects and the need to cut taxes and duties on insurance, particularly given the compounding impact on those paying the highest premiums.