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Debbie exposes hole in cyclone defences

The damage wrought by Cyclone Debbie has again highlighted insurance affordability worries in northern Australia, exposing a lack of action by the Federal Government, which has left decisions on the issue languishing for more than a year.

The void has been filled by MP Warren Entsch, who has long argued the insurance industry’s mitigation focus won’t be enough to cut soaring premiums in the tropical north, where he represents the Leichhardt electorate.

Mr Entsch is pushing for a government-underwritten insurance mutual that could provide affordable cyclone cover. The mutual, potentially funded through a compulsory levy, would operate in the market along with private companies.

A proposal, involving Regis Mutual Management and Willis Re, has been submitted for government assessment, updating a previous plan Mr Entsch put forward when Tony Abbott was prime minister.

The plan has been criticised by major insurers, which point out the mutual concept was rejected by the Northern Australia Insurance Premiums Taskforce, which delivered its final report in November 2015.

“A government mutual would merely paper over the cracks and not address the heart of the problem in the north – the high risk of cyclones devastating whole communities, flattening homes and neighbourhoods,” Suncorp Insurance CEO Anthony Day said.

Mr Day, who is inspecting Debbie’s handiwork at Hamilton Island today, says the Government “should be willing to listen and act on the strong advice of its own inquiries”.

Some 18 months after it first received the taskforce report, the Government has still not responded to it, and in the absence of any action or policy clarity from Canberra new debates are emerging. They are raking over the same old arguments the taskforce was established to examine and make recommendations on.

The report concluded mitigation is key to reducing prices in the cyclone-prone region. But if government intervention is to be pursued, a reinsurance scheme is preferable to the mutual insurer option.

Modelling found a commercially run cyclone mutual couldn’t offer premiums below current rates, and they may even be higher.

A government-subsidised scheme aimed at reducing premiums by 30% carries a 70% risk of costing the Government money over a 10-year lifetime, with a 10-20% chance costs could top $5 billion.

The report examines options for making a mutual work more effectively, without finding a solution.

Reinsurance by the mutual could reduce the extreme risk of large calls on the Government, but would likely raise costs. Capping payments, potentially to $30,000 via a “first-loss scheme”, could cause consumer confusion and delay claims.

The report points to problems following New Zealand’s Christchurch earthquakes, when high-value claims were split between the Government and private sector.

A mutual may also become the only cyclone-damage insurer if private suppliers then abandon providing cover, making it difficult for the Government to ever step aside.

Mr Entsch says the revised mutual plan should be part of wider efforts to reduce premiums, and that governments are “on the hook anyway” if market failure leaves the community uncovered.

Allianz GM Corporate Affairs Nicholas Scofield says a cyclone-focused mutual would not be able to spread risk and would lack arrangements insurers use to reduce claims costs, while it could be unclear where its mandate would end in terms of geography and damage.

“You would have this very complex interaction between the so-called cyclone mutual and the insurers that are providing cover for other perils,” he said.

IAG says mitigation is the path to keeping claims down and premiums affordable, wherever disaster may strike.

“As the Prime Minister said in Lismore recently, ‘prevention is the key and mitigation is the key’,” a spokesman said.

“IAG has consistently held the view that the best way to address premium costs is through risk reduction via mitigation projects – and that applies across Australia, not just to north Queensland. Any other proposals are simply short-term answers to a long-term problem for these areas.”

Still, mitigation when it comes to cyclone damage is not the same as for floods. Levees may divert gushing water, but no amount of infrastructure will stop a cyclone crashing into coastal population centres.

The expense of upgrading older homes to better withstand cyclones, and the likely impact on individual premiums, remain issues for debate.

The Australian Reinsurance Pool Corporation, established to ensure terrorism cover after private insurers withdrew following the September 11 2001 attacks, is an example of a successful government response to a problem.

Overseas, New Zealand’s Earthquake Commission provides a level of cover in a country vulnerable to seismic catastrophes, and the UK’s Flood Re reinsurance pool has reduced premiums for people in high-risk locations during its first year of operation.

Allianz says a reinsurance scheme, building on current arrangements, is potentially the most efficient and least disruptive way to ensure cover for cyclone and high-flood-risk properties in Australia, if the Government determines intervention is required.

“A natural disaster reinsurance pool could be used to address the lack of affordability of home insurance premiums for those Australians facing high weather-related insurance risks,” it says.

Under the proposal, a government-regulated pool could be operated by the insurance industry and funded through a modest levy on residential policies, similar to the way the terrorism pool operates in the commercial sphere.

However, the National Insurance Brokers Association notes the terrorism pool has been called upon once since it began operation, following the Martin Place hostage crisis in 2014, whereas cyclones are not rare events.

Cyclone Debbie followed the devastating Yasi in 2011 and Larry in 2006, and several smaller but still powerful cyclones have caused damage between those major catastrophes.

The issue of affordable insurance is also covered – yet again – in the current Senate Economics References Committee inquiry into Australia’s general insurance industry, which is due to report by June 22.

Various parties note insurers have made great progress in the past decade in providing flood cover, but the fact remains affordable policies are beyond reach for many in the areas most affected by cyclones and tropical storms.

An insurance mutual might not be the answer, but it’s time for a clear direction and some action on the alternatives – including mitigation.

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