The interim report canvasses policy options for consultation to assist the Northern Australia Insurance Premiums Taskforce in developing policy recommendations for a final report to the Government.
The Taskforce is charged with exploring the feasibility of options that use the Commonwealth balance sheet to reduce home, contents and strata insurance premiums in those regions of northern Australia that are experiencing insurance affordability concerns due to cyclone risk.
The background to this task is concern over the impact of the significant increase in insurance premiums in parts of northern Australia, particularly in northern Queensland, that has occurred in recent years. The rapid increase in premiums is causing hardship for individuals and may be influencing the growth and development of the areas affected.
There have been a number of reports on the rise of insurance premiums in northern Australia. These include: the 2012 report by the House of Representatives Standing Committee on Social Policy and Legal Affairs, In the Wake of Disasters, Volume Two: The affordability of residential strata title insurance; three reports by the Australian Government Actuary; and the Australian Government's 2014 discussion paper Addressing the high cost of home and strata title insurance in northern Queensland. In addition, there have been other reports that are relevant to the work of the Taskforce. These include the recent Productivity Commission Inquiry Report on Natural Disaster Funding Arrangements and the 2011 report of the Natural Disaster Insurance Review.
The Taskforce will not be 'reinventing the wheel', but is drawing on all this previous work in undertaking its assignment.
The specific task set for the Taskforce is to explore the feasibility of two options — a mutual cyclone insurer and a cyclone reinsurance pool — along with other options that are put forward in the course of consultations (Terms of Reference are at Appendix A). These options are to be evaluated having regard to: the potential reduction in consumer premiums; the likely cost and risk associated with using the Commonwealth balance sheet to lower the cost of insurance to consumers; the potential effect on the operation of the insurance and reinsurance markets, particularly the likely effects on competition; and how the role of the Government can be gradually reduced over time.
Consistent with its terms of reference, the following principles underpin how the Taskforce is approaching its work:
- The options should be responsive to the concerns of individuals experiencing acute affordability issues associated with cyclone risk.
- The options should, as far as possible, be targeted to have the greatest impact on consumers experiencing insurance affordability issues resulting from cyclone risk without discriminating between states or parts of states.
- The options should, as far as possible, support a competitive private market for insurance.
- Incentive structures should be appropriate, in particular, the incentive for people to reduce the vulnerability of their property to cyclone damage.
- The objective should be to achieve the biggest reduction in consumer premiums for the least cost and risk to the Commonwealth balance sheet.
In conducting its review, the Taskforce has been consulting widely and has drawn on its Reference Panel of stakeholders for advice and guidance. The members of the Reference Panel are listed in Appendix B and the organisations consulted to date by the Taskforce are listed in Appendix C.
The Taskforce has sought to update information on the movement of insurance premiums in northern Australia and gain a better insight into the diversity of the rise in premiums faced by individuals. The Australian Government Actuary was commissioned to update and extend the previous reports he has prepared on home and contents and strata title price rises in northern Queensland and other parts of northern Australia. In addition, the Taskforce is drawing on the reports of insurance price rises that have been raised with it during the course of its consultations.
A particular focus has been consultations with consumers and consumer groups, recognising that the rise in premiums has caused significant concerns for many consumers and the circumstances individuals face can differ significantly. The Taskforce is conscious of the importance of ensuring that the options respond to the major concerns of consumers. The Taskforce has also sought to gain an understanding of the extent to which the rise in premiums has impacted on economic activity in northern Australia.
The options the Taskforce is specifically evaluating to lower premiums involve carving out 'cyclone risk' from existing arrangements — the risk of cyclones is attributed as the main factor as to why insurance premiums in northern Australia are significantly higher than those in the rest of Australia. However, existing insurance and reinsurance arrangements do not have a separate, defined category of 'cyclone risk' nor is there a 'cyclone policy' that consumers can purchase. As such, it is important to clearly define what risks may potentially be shifted from insurance and reinsurance companies to the Commonwealth balance sheet. This involves clearly defining a cyclone and the damage caused by a cyclone for the purpose of the options. For example, uncertainty on this issue could result in significant confusion for consumers and they may end up not being insured for certain risks. Similarly, a lack of clarity over coverage of 'cyclone risk' can cause uncertainty for insurance companies with their reinsurance arrangements, which may reduce the benefits of any reduction in premiums.
Given the complexity of the issues raised with the options being evaluated, the Taskforce is consulting widely with industry experts in insurance and reinsurance. The objective of these consultations is to assess how the options could mesh with existing insurance arrangements and whether they would achieve the outcomes sought by the Government, namely a reduction in premiums for consumers while taking into account the impact on the market. A number of the issues that require consideration are outlined in this interim report and the Taskforce would welcome comments on these issues. The Taskforce will continue to consult widely as it prepares its final report.
An important part of the consultations is an assessment of the competitiveness/contestability of the insurance market in northern Australia. A competitive market will best serve the long‑term interest of the consumers in northern Australia and it is important that the options being considered support competition. In addition, competitive pressures will be an important factor in determining whether some of the options for Government intervention in the insurance market will flow through to a reduction in premiums for consumers.
The Taskforce has focused on the issue of mitigation, particularly to ensure that there are appropriate incentives for individuals to reduce the vulnerability of their property to cyclone risk. An important incentive should be the prospect of lower insurance premiums. The Taskforce is consulting with experts in cyclone mitigation and with the insurance industry to see if the incentive structures for mitigation are as effective as they could be.
The feasibility of the options being assessed will also depend on whether they are consistent with Australia's regulatory standards for insurance. With this in mind the Taskforce is consulting with the Australian Prudential and Regulatory Authority (APRA).
Some of the options to reduce premiums to consumers involve the federal Government taking the risk of losses due to cyclones onto its balance sheet. The Taskforce will be commissioning specific modelling to estimate the possible risk to the Commonwealth balance sheet from the options being assessed. This includes not only taking into account insurance losses from past cyclones, but assessing the probability and likely impact of future cyclones. As a first step in gaining an insight into this exposure, the Taskforce has
commissioned modelling to assess the magnitude of the likely total insurance loss of cyclone events in Australia. This work will provide an upper bound of likely losses. The amount that will be covered by the Australian Government will depend on the design of the options.
The Taskforce will continue with this approach in completing its final report by the end of November 2015, and in doing so will draw on the comments it receives in response to this interim report.