The issue of high insurance premiums in north Queensland has been bubbling away for several years, with solutions canvassed by the Federal Government ranging from expensive but harmless (a comparator website) to downright dangerous (admitting unlicensed foreign insurers into the market).

As insuranceNEWS.com.au reported last week, much of the heat has gone out of the issue over the past six months. The suggestions now being explored – a mutual insurer or a reinsurance pool – are suitably serious. But tame as these might be, there are still three big questions to be asked:

1. Is there really an insurance affordability crisis in northern Australia?
2. How much will it cost taxpayers to finance an ongoing regional insurance solution to a problem that may not even exist?
3. Isn’t there a better way?

Several submissions to the Northern Australia Insurance Premiums Taskforce seen by insuranceNEWS.com.au point out that it’s difficult to come up with a meaningful discussion on insurance affordability when no one has actually managed to pin down the size of the problem, or in fact establish whether there’s a problem at all.

As the Insurance Council of Australia (ICA) puts it a tad verbosely: “The task of developing a response to insurance affordability has been made difficult through a lack of clear evidence that can be used to define, with precision, the nature of the perceived issue, and as a consequence of that lack of definition, its precise quantum, drivers and the potential solutions.”

Suncorp’s submission puts it more bluntly. “To date, the affordability debate has been characterised by anecdotal accounts of premium increases, and misleading data comparisons used to portray market failure.

“The term ‘market failure’ has also been used inappropriately to describe the situation in northern Australia. In order for the insurance market to be failing, there would need to be insufficient cover available to meet demand. This is not the case.

“Previous inquiries, including those undertaken by the Productivity Commission, the Australian Government Actuary and the Financial System Inquiry, have concluded there is no market failure contributing to premiums in northern Australia.”

Other insurers’ submissions sighted by insuranceNEWS.com.au follow much the same line. While there have been isolated cases where premiums have been raised to alarming levels for buildings that are under-strength or critically exposed, the 2000% premium rises have long since vanished – if they ever existed.

The insurers’ very thorough research shows the median premium for a $350,000 strata unit in north Queensland today is $1572, and only 1.8% of residents pay more than $3000. House policies for $350,000 have a median premium of $1697, with fewer than 2.2% of owners paying more than $3000.

The claim that householders in the region carry massive excesses to lower their premiums is also exposed as a furphy, with 93% of strata unit owners having an excess of $300 or less, and 94% of house owners having an excess of $1000 or less.

Polling for the industry by Crosby Textor – perhaps coincidentally the Liberal Party’s favoured pollster – shows 82% of north Queenslanders believe they have a high/medium chance of being affected by a cyclone, and 85% are aware higher premiums are due to the cyclone risk they face.

With similarly careful evidence refuting claims of a market failure (more than a dozen insurers are active in the region) and underinsurance (levels of which are no different from the rest of Australia), there’s a niggling suspicion emerging that the issues upon which the taskforce’s inquiry were set up might not actually exist.

But even if there’s little or no evidence to justify setting up a mutual insurer or a reinsurance pool, what would either option cost the Federal Government?

Good question. The major industry submissions argue a mutual offers limited guarantees of consumer protection and risks increasingly higher premiums as the claims payment pool diminishes, leading to solvency issues that could only be resolved by the Government topping up the tank.

And if additional cyclone-related hazards such as flood were factored in – and there would probably be political pressure for such extensions – the claims costs would continue to rise.

Nor would a reinsurance pool help. The industry argues that the relationship between the pool and insurers would be crucial, and the complexity of what insurers cover and to what level before the pool kicks in would hinder the recovery process.

An example of that is close to hand: the New Zealand Earthquake Commission’s work with insurers has been complex and frustrating for all parties, particularly claimants. As insuranceNEWS.com.au noted on July 6 (see earlier story), the New Zealand Government is proposing major changes that would see insurers take the claims management lead after future catastrophes.

So, is there a better way of approaching the problem of cyclones and buildings? The taskforce’s brief includes an examination of mitigation possibilities, and it’s this area the industry has thrown its full weight behind.

While a great deal of money has already been invested in mitigation programs by individual insurers and the industry, they propose a mitigation assessment scheme to strengthen individual buildings that don’t comply with modern cyclone-resistance standards.

The one-off cost of the program to the Government would be $361.2 million – “a fraction of the likely cost of a mutual or reinsurance pool”, ICA says.

Of course, with stronger and more cyclone-resistant buildings come lower risks and lower premiums.

The industry proposes a range of ongoing programs to keep risks low, including briefing teams to visit regional centres to discuss cyclone and insurance issues.

History shows the insurance industry has often been a reluctant innovator – some insurers had to be dragged kicking and screaming into providing flood cover, for example – but in this instance the thoroughness with which insurers have gone about addressing the north Queensland premiums argument is impressive.

The industry submissions seen by insuranceNEWS.com.au look at the whole picture, factor in the uncertain future for northern Australia brought about by climate change and propose a solution that attacks the problem at its source.

It’s likely this united message will receive a more positive reception in Canberra than it might have a couple of weeks ago. As insuranceNEWS.com.au noted last week, a reactive administration that focused on quick-fix solutions has been replaced by one with less appetite for market interventions.

Economically and socially, the industry’s preferred option is compelling. It focuses on a simple way to minimise potential loss and steers away from what is likely to be a costly – and unnecessary – Band-Aid solution.