Political decisions regarding Queensland sometimes verge on the bizarre, and that’s probably the best way to describe the bomb Federal Finance Minister Mathias Cormann dropped on the insurance industry on Thursday.

He announced the Federal Government will establish a comparison website for home and contents insurance in north Queensland and allow unauthorised foreign insurers (UFIs) to operate in the market.

The minister’s announcement blindsided the industry. It was not consulted on the decision to push forward with the initiatives, which were formulated earlier this year. They were unworkable then and time hasn’t made them any more realistic.

Senator Cormann says the initiatives will address insurance affordability in the region, which is true. What they won’t do is solve anything.

The affordability issue is tied not to market forces but to the region’s vulnerability to cyclones and the damage that results.

Faced with unassailable economic logic, Senator Cormann has taken the political option: he has done something, even if it’s no solution at all.

He appears to have succumbed to the argument expressed by local MP Warren Entsch, who says Australian insurers “have dealt themselves out of the picture” by failing to offer affordable cover.

While Mr Entsch’s lobbying on behalf of his electorate is admirable, his argument is fatuous.

He wants insurance companies to be benevolent capitalists. The insurers are damned by their shareholders when they incur massive losses from cyclone damage they underpriced, and damned by their policyholders and politicians who should know better when premiums are imposed that match the risk.

One has to feel some sympathy for the Australian Securities and Investments Commission, which just a few weeks after criticising the limitations of the commercial sector’s comparison sites has been charged with building one itself. This will be interesting, if nothing else.

Senator Cormann says the site “will enable consumers to compare the performance of insurers on price, product features and claims-handling complaints”.

insuranceNEWS.com.au understands quotes on the website will be based on an average rather than individual risk, so they will do little more than remind people of the high levels of premium they are paying. It’s certainly not a solution.

And as numerous critics have pointed out, insurers will always have the option of pricing themselves out of contention for risks they are not prepared to take on.

While a detuned comparator/information site is likely to be as useful as the bureaucrat who thought up the concept, the decision to allow UFIs back into the market is, putting it politely, naïve.

The Government has been swift to point out that UFIs already do considerable business in Australia, but has failed to mention that it’s all based around complex and specialised business policies, such as cover for radioactive materials, toxic or explosion loss, terrorism, health research and space debris damage.

Nor has the Government noted that brokers can only place such business if it can’t be placed locally and that the client must have operating revenue or assets worth at least $200 million, or employ at least 500 people.

The UFI must also be based in a country that is a member of the International Association of Insurance Supervisors or another organisation recognised by the Australian Prudential Regulation Authority (APRA), and it has to satisfy APRA that it can pay claims.

Funny how the Government forgot to mention that, but that’s what happens when you clutch at straws.

There is another type of UFI for which nobody in their right mind would open up the market. There is a real risk the north Queensland market would fall prey to the spivs and shysters APRA spent much of the early part of the century eliminating. Do we really have to go there again?

For an example of the hazards Senator Cormann and his advisers seem unaware of, we need only look at the fallout from the Christchurch earthquake, where Western Pacific, an insurer with low premiums and inadequate reinsurance, fell over when the claims started coming in.

The New Zealand regulator has belatedly become a big fan of strict prudential standards. It has copied much of its approach from APRA, whose officers must be viewing this latest development with trepidation.

While brokers and their professional indemnity insurers are averse to the use of such companies, the entry of any unregulated insurer would place the highly regulated Australian insurers at a considerable disadvantage.

For the property-owners of north Queensland, the real problem with Senator Cormann’s so-called initiatives is they won’t do anything to solve the problem of high property insurance premiums, because they can’t. They’re merely measures that enable politicians to proclaim: Look – I’m doing something about it.  

Something is, in fact, being done, but it’s unexciting background work that nevertheless will, over time, result in greater knowledge of the risks faced by property-owners and their insurers in northern Australia. It will also, over time, lead to a lasting resolution of the issue.

Insurers are financing research into the resilience of buildings in the region, analysing past cyclone events to learn as much as they can about vulnerability and paying specialists to examine individual buildings so weaknesses can be dealt with and premiums lowered.

The industry has moved on from paying out ever-increasing claims on risks that were for too long heavily undervalued. Remediation – fixing the causes of the problems so the risks are lowered – is the only logical way forward. Unfortunately, that takes time and doesn’t fit in with the political need for rapid and visible action.

For now, the only way to feasibly lower property premiums would be to remove the word “cyclone” from product disclosure statements. That would have the benefit of solving the immediate political problem for Senator Cormann and Mr Entsch. Until, that is, the next cyclone comes along and the blame game begins all over again.