Submissions to the Northern Australia Insurance Premiums Taskforce on insurance options in the region are a mixed bag, with plenty of opinions proffered from a variety of stakeholders.

Not surprisingly, many of the 32 submissions published by the taskforce last week (three others were kept confidential) clearly reflect the stakeholder’s priorities and major concerns. 

For example, the Christmas Island Tourism Association and the Administrator of Indian Island Ocean Territories are as concerned with the availability of insurance as they are with affordability.

Insulation Australia – which represents insulation manufacturers, distributors and installers and is one of only two non-insurance associations to make a submission – calls for mitigation work on buildings to minimise the level of post-cyclone claims, saying use of the Commonwealth balance sheet “would not provide an incentive for property-owners to take action to mitigate the risk of damage”.

In that regard, it’s singing from the same song sheet as the insurance industry, which has overwhelmingly rejected the options of a government-backed mutual insurer or reinsurance pool.

Only Allianz has stood apart from the other five individual insurers that made submissions. It spruiks the advantages of a reinsurance pool, although its consideration of the mitigation option – which insurers and their peak body, the Insurance Council of Australia (ICA) heavily favour – is equally strong.

ICA, the National Insurance Brokers Association (NIBA), the Australian Reinsurance Pool Corporation (ARPC) and mutual insurance specialist Regis Mutual Management, which belong to the reference panel assisting the government taskforce, have also made submissions. 

Following are brief summaries of major submissions insuranceNEWS.com.au has not previously reported.

We have already covered the submissions of ICA, Suncorp and RACQ Insurance – each of which makes a strong case for retrofitting houses in north Queensland to make them more cyclone-resilient – and the Financial Rights Legal Centre, which says lower premiums flowing from the taskforce’s conclusions should be made available in high-risk areas across Australia.

The Allianz submission is covered elsewhere in this bulletin. See here.

We have not attempted to include in this report the 10 submissions from individual residents and other submissions not specific to insurance.

Following are brief summaries of other important submissions

IAG:

Australia’s largest insurer says the Government’s primary role in the issue should be to “reduce community vulnerability to extreme weather events with a policy framework that promotes stronger building codes, risk-appropriate land use planning and preventative infrastructure investment”.

It says governments need to ensure appropriate risk management policy settings do not crowd out the private insurance market.

They should also “avoid interventions that promote dependence on government assistance and reduce incentives for self-reliance and personal responsibility”.

“Any financial assistance provided by the Government should be targeted, means-tested and accompanied by mitigation strategies, so as not to undermine long-term risk disaster resilience measures,” IAG says.

“Importantly, these initiatives should not undermine the role of insurance prices and availability in creating an incentive for individuals, businesses and governments to reduce their exposure to weather-related risk.”

On the option of a mutual insurer for northern Australia, IAG says an insurance market that “has entities operating in a regulatory vacuum for the sake of ensuring cover is available to those who seek it (no matter what the quality)” is not an optimal public policy result.

“It suggests a misplaced concern for an outcome rather than a viable ongoing solution to the original problem.”

The insurer insists a mutual insurer should meet the same prudential and reporting standards as any other insurer, because without this it would gain an unfair competitive advantage over local insurers.

Nor does IAG believe in the concept of a government reinsurance pool for cyclone risk.

“A pool would inevitably become a drain on government resources… These pools are only appropriate where there is no private market solution available. This is not the case for cyclone risk.”

And it warns a reinsurance pool “can increase the potential burden on the taxpayer after a loss and create hidden subsidies. It can also limit the effectiveness of the insurance industry by distorting competition and reducing rates to uneconomic levels.

“Losses to the Government would be expected to occur frequently, and we expect a scheme would not be self-funding for a number of years. Setting subsidised reinsurance rates lower than the technical rates that cover expected losses will exacerbate this.”

Actuaries Institute:

The highly regarded Actuaries Institute acknowledges the conclusion of the Australian Government Actuary that the north Queensland market “has not been profitable for insurance companies” nor even sustainable at the historical premium level.

It points out catastrophe modelling techniques have advanced considerably in the past 8-10 years, giving insurers “a better understanding of the hazards and insurers’ ability to individually risk-rate certain exposures”.

The economic benefits of a mutual insurer are “modest”, and the actuaries warn there are many complications involved in setting one up. These include coverage gaps, interaction with private insurers and difficulties in determining the appropriate premium.

And they warn any approach requiring significant premium subsidies exposes governments to “high and long-term” potential costs.

“The premium subsidy will also distort the effectiveness of the insurance premium acting as a price signal,” the institute says. The subsidy would also reduce incentives for loss mitigation “and may bring anti-selection concerns for the mutual insurer”.

It agrees higher reinsurance costs have contributed to the increase in domestic and strata premiums, but adds the rises were due to previous under-pricing in the market.

“Setting up a reinsurance pool may have little impact on the overall cyclone premium if [it] is not subsidised by government funding.”

The actuaries’ peak body says a focus on risk mitigation would bring a true reduction in underlying exposures and long-term sustainable premium reductions.

“In addition to the insurance premium reductions, mitigation helps to raise community awareness of cyclone hazards and improves risk resilience.”

The social benefits would include lower damage levels and less disruption in communities, the institute says.

And it notes modelling by KPMG has shown that over 10 years a $250 million annual investment in disaster mitigation could result in a $6.5 billion boost to Australia’s GDP, “while a [reinsurance] pool approach reduces GDP over the same period”.

QBE:

The Sydney-based global insurer has a large operation in Queensland, and warns government intervention “can distort or destabilise a functioning market [and] runs the risk of thinning or undermining the availability of private insurance”.

“If private insurance cover becomes scarce, it is simply a question of time before the Government will be required to fund losses, which will have significant implications for the fiscal spend,” it says.

QBE says the prospect of government intervention in the insurance market has received little attention to date, and notes that “effectively using the Commonwealth balance sheet to lower the cost of home insurance premiums in one geographic area, for one particular peril, would be an historic step in economic policy”.

“Introducing such a scheme [would] set significant precedents for a range of other disaster types and a range of other domains,” the insurer says. “It is inevitable that the Government [would] be asked to rectify plausible anomalies and extend support for additional perils and geographic areas – for example, people in bushfire-prone areas in Victoria [and] people in flood-prone areas of NSW.”

QBE notes the anomaly in a levy being imposed on premiums “to fund a scheme that is aimed at improving the affordability of insurance. Alternatively, raising taxes across Australia to finance the suggested reinsurance pool or mutual option will be a drag on growth, with a classic misallocation of resources from more efficient to less efficient uses.

“Given the unique work undertaken by ICA to define the extent and nature of the issue and the significant implications of the proposed options… QBE believes the case for broad-based market intervention by government has not been made.

“Rather, the market is working effectively to price and balance risks in the high-risk market of northern Australia.”

Lloyd’s:

Expressing doubt that mutual insurer and reinsurance pool arrangements would deliver the effective solution sought, Lloyd’s calls on the Government to work with the private market to encourage risk mitigation techniques and procedures “to more appropriately achieve the taskforce’s aim of reducing premiums”.

While Lloyd’s believes in governments’ role in mitigating and managing the prevention and aftermath of natural disasters, it says “this should not consist of direct, top-down intervention” in the market.

“The creation of insurance programs or a pool can distort competition by hampering the application of risk-based actuarial principles,” the market says. “Indeed, when the offering and pricing of insurance is not risk-based, it inaccurately reflects the risk environment.”

Lloyd’s submission makes use of its overseas experience to demonstrate how government-run insurance schemes in Florida and Texas have accumulated massive liabilities.

The Citizens Property Insurance Corporation in Florida, for example, has evolved from a market of last resort in 2002 to be the state’s largest property insurer.

“Despite the creation of a large financial buffer as a result of recent benign hurricane seasons, the mutual has been warned by actuaries that it will have to borrow significant funds to pay claims,” Lloyd’s says.

While the organisation “firmly believes it is the private insurance market that should remain the first line of defence for the protection of Australian property-owners”, it supports the “key role governments have to play in leading risk mitigation programs”.

“Governments should focus on improving properties and communities in cyclone-prone regions, rather than asking taxpayers from low-risk areas to subsidise those in high-risk areas,” Lloyd’s says.

“Any solution should integrate urgent mitigation and building resilience measures that improve the capacity of cyclone-prone communities and individual property-owners to withstand extreme weather.”

NIBA:

The brokers’ peak body notes a greater level of participation by insurers and underwriting agencies in north Queensland in the past six months, and says some areas of the market are becoming very competitive.

But it says NIBA members continue to have great difficulty placing cover for older properties, with very few insurers prepared to quote for these policies, and some providing quotes designed to discourage the business.

NIBA is concerned the disadvantages of a mutual insurance arrangement “would outweigh any possible advantages”.

A discretionary mutual fund does not provide an insurance contract or formal process of risk transfer and there is no binding promise, the association says. Such an arrangement is more appropriate for defined groups with strong common interests and a willingness to jointly manage and finance their mutual risks outside the normal insurance market.

It says a mutual insurer regulated by the Australian Prudential Regulation Authority (APRA) “would effectively concentrate risk to such an extent that APRA would require substantial risk capital well in excess of that required to be held by current insurers, who are able to spread the risk of north Queensland weather losses across their entire book of business”.

“NIBA firmly believes a mutual insurance company – either state-owned or with substantial state financial guarantees – would distort the property insurance market in northern Australia,” the submission says.

It says a carefully designed cyclone risk reinsurance pool “would be likely to be of most benefit” to consumers.

“The fixed period of time during which the Commonwealth supports the cyclone pool, and a strong commitment to exit the pool, should send a strong message to the community that steps will need to be taken to improve cyclone resilience in northern Australian properties.

“People on low incomes may need additional support to undertake cyclone retrofit activities.”

NIBA says governments determine what is built, and where and when it is built.

“If insurance is to remain affordable for most members of the community, it is crucial that the overall level of losses, and ultimately the claims cost per policy, is managed effectively, and is kept as low as possible.

“This will only occur if there is concerted effort, by all levels of Australian governments, to assess and manage the cost of weather and other natural disaster events.”

Regis Mutual Management:

Established in 2007 to set up and even provide management for mutual insurers, Regis concentrates on that option in its submission.

It says the mutual model “is designed to make affordable insurance cover accessible to populations whose needs are insufficiently catered for by the existing insurance market”.

It suggests a “blended approach”, combining the direct pricing and public participation of a mutual with the reinsurance capacity and skills of the ARPC.

Mutual insurers are owned by the policyholders, and therefore “provide both the incentive and imperative for improving community resilience to adverse weather events”.

Regis says government support for the mutual – which could be scaled back over 5-10 years –would have to include a guarantee and/or annual aggregate reinsurance program to protect the mutual from the risk of multiple claims events.

“Both the loss experience and progress of mitigation measures could accelerate or slow down the reduction of government support.

“The Government can manage subsidisation by providing discounted reinsurance from the ARPC for the primary mutual layer.

“This arrangement gives the Government management of the subsidy and enables policyholders to confidently manage their risks through their ownership of the mutual fund.”

Australian Reinsurance Pool Corporation:

Established in 2003 to provide a reserve for terrorism claims, the ARPC makes it clear it is not for or against the concept of a cyclone reinsurance pool, but says if that route is chosen, it should be the go-to organisation.

Its submission says its guarantee of solvency from the Government could also be used for cyclones, and its existing infrastructure “may make implementation relatively straightforward”.

But it warns the Government should expect losses to occur frequently, “and we expect a scheme would not be self-funding for a number of years. Setting subsidised reinsurance rates lower than the technical rates that cover expected losses [would] exacerbate this.”

The ARPC also notes the Government’s recent habit of raiding ARPC reserves as compensation for providing the pool with a financial guarantee – the total takeout from 2012-18 is expected to be $800 million – is “reducing ARPC’s reserve for claims for terrorism, which creates a medium-term financial sustainability issue”.

“It is important to ensure that our reserve for claims for terrorism be held separately to (or segregated from) the reserve for claims for cyclones,” it says.

Queensland Chamber of Commerce and Industry (CCIQ):

Among other peripheral issues, the CCIQ wants all insurance contracts to carry standard terms and definitions similar to the standard definition of flood.

It calls for the reduction or removal of stamp duty on insurance, saying it is inequitable and actively discourages businesses from adequately protecting their assets.

And it wants foreign insurers to be allowed into the north Queensland market to “provide relief to customers through promoting robust market competition”.

“The CCIQ supports the Federal Government’s budgetary commitment to the funding arrangements, which will provide up to $12.5 million over three years… to provide grants to bodies corporate to undertake engineering assessments of strata title properties in north Queensland,” it says.

The chamber calls for funding to allow assessments of other commercial buildings, and defined settlement times for insurance claims.

Green Cross Australia:

This non-profit organisation says it is “dedicated to empowering a resilient Australia”.

Its submission supports the benefits of mitigating disaster risk through incentive-based initiatives that would “transform the insurance market with pricing that reflects reduced risk, rather than subsidising insurance”.

“We believe that insurance subsidies [would] create a disincentive towards resilience, in the face of growing natural disaster risks associated with climate change and increasing disaster-related interdependencies in more populated areas with greater levels of public and private infrastructure,” it says.

Green Cross says research conducted by the James Cook University’s Cyclone Testing Station and consulting firm Urbis in Suncorp’s “Protecting the North” initiative shows for every dollar spent on low-cost retrofits, the community would save at least $3.

“Installing strapping on replaced roofs could deliver up to about $12 [in savings] for every dollar spent,” it says. “Some low-cost retrofits will even pay for themselves after only one Yasi-like cyclone.

It says while the taskforce’s terms of reference are limited to northern Australia and cyclones, insurances premiums will inevitably rise as the impacts of climate change continue to grow across bushfire, flood and severe storm hazards 

“There is a risk that cyclones will track further south into more populated parts of Australia. Surely building resilience to demonstrable risks is a better approach than creating a significant and potentially growing taxpayer liability by subsidising insurance and masking underlying risks.”

All the submissions can be read in full here.