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The reinsurance pool reckoning that had to come

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When the Morrison government announced in February that its upcoming cyclone reinsurance pool would provide premium savings of up to 50% and more, there was widespread scepticism across the insurance industry.

Many industry experts wondered how such colossal savings could be achieved when the $10 billion-backed pool scheme the new Labor administration has inherited from its Coalition predecessor is designed to be revenue-neutral for the government.

The pool, which went live on Friday, forgoes a profit margin, but reinsurance is one of many costs feeding into premiums, and the saving also only applies to the cyclone element of reinsurance.

“Show us the modelling” was the cry from Labor, the industry, (and insuranceNEWS.com.au).

While the scheme was introduced to solve the insurance availability and affordability crisis in the north, one might have thought Treasury’s modelling would be readily available. But the former federal government refused, citing commercially sensitive information from insurers and the confidentiality of cabinet discussions. They would be made available later in the year – way after the May federal election.

Not surprisingly, this raised industry suspicions that the Morrison government was playing clever to keep its crucial northern electorates onside. (If that’s what it was about, they succeeded.)

“There’s no way they’re getting to those figures, and there will have to be a reckoning at some point,” a senior industry source told insuranceNEWS.com.au shortly after the Liberal-Nationals coalition lost the election.

So last week Labor did what it had to do – given its comments while in opposition – and released “the modelling”, which it says shows the previous government’s figures to be a “wild exaggeration”.

“The promise of a premium reduction of up to 58% was simply not true and they knew it,” new Financial Services Minister Stephen Jones said.

“The [Labor] Government acknowledges this is a difficult day for northern Australians facing increasing cyclone risk who have been expecting substantial relief from high premiums.

“The previous government was clearly engaged in a political solution based on deceit and deception rather than levelling with northern Australians.”

The now infamous Coalition figures promised savings of up to 46% for homeowners, 34% for SMEs, and 58% for strata properties.

The document released by Labor which was compiled by actuarial consultants Finity shows average savings across the entire sample set (almost 200,000 properties across Queensland, Northern NSW, WA, and NT) as 8% for home, 14% for SME and 13% for strata. The expected savings increase to 19%, 17% and 15% respectively for northern Australia properties, and 38%, 28% and 18% for the worst-affected properties.

Of course, a healthy dose of scepticism should be applied to all sides of politics – and it’s possible for both sets of numbers to be correct.

If the worst-affected homes (a sample of about 450 properties) can expect a 38% premium decrease on average, then logic dictates some of those would get even higher savings – maybe even, for example, 46%.

There are wider discrepancies on high-risk SME and strata, but Finity warns in its report that the sample sizes in these categories are too small for estimates to be reliable.

Also interesting to note is the date on the report – June 28 2022 – suggesting that the Morrison government may not have had access to the same report, or at least not the very same version of it.

The veracity of the Morrison government’s figures was defended at the time by Treasury officials, not just politicians – and it seems inconceivable to they were not based on some hard evidence.

Liberal MP for the north Queensland seat of Herbert Phillip Thompson says Mr Jones has been “completely disingenuous” in his comments.

“We were very clear,” he says. “We always said for home owners facing the most acute cost pressures there would be savings of up to the figures used, based on the advice provided at the time.”

Warren Entsch, the Liberal MP for the north Queensland seat of Leichhardt, has campaigned on the affordability issue for a decade or more. He says the new government shouldn’t be passing the buck.

“Why didn’t they raise this weeks ago, rather than the day before the pool launches?” he told insuranceNEWS.com.au.

“They voted for this; they didn’t propose any amendments. They are in government now and they have to govern. If there are problems with the pool, fix them.”

Even if the “up to” Coalition figures were accurate at the time, it’s probably fair to argue their promotion and distribution in election material without further context was in itself disingenuous, and the move appears to have falsely raised consumer expectations.

“For northern Australia policies in our sample, overall savings in the order of 15-20% are estimated across home, strata and SME insurance,” Finity says.

This would have been a more sensible statistic to disseminate.

Thanks to the Finity document, we have a better picture of the savings the pool will provide, and despite last week’s rather blunt expectation management exercise by Labor, consumer groups still believe it’s a scheme that’s worth proceeding with.

The savings may not be enough but they’re a start. And now that the scheme is live, pressure will start to build on insurers to join up and pass those lower premiums on.

Large insurers have until December next year to have all eligible policies transferred into the pool, and smaller insurers have until December 31 2024.

But companies risk criticism if they leave it until the last possible moment. As the MP for a region that has been crying out for relief for years, Phillip Thompson says he’s already written to all the major underwriters urging them to get a move on.

“Insurance companies have no problems implementing increases to premiums with little to no lead time,” he says. “There are absolutely no excuses for any delays around passing on the cost savings to North Queenslanders.”

Renegotiating reinsurance programs isn’t a simple process, so some patience will inevitably be required.

In the meantime, the new Labor Government says it’s committed to tackling the root cause of the affordability issue by lowering the risk.

It has committed to investing $200 million a year in resilience measures, and Mr Jones flags the importance of adhering to stricter building and land-use standards.

“Most of the answers are outside insurance, not inside,” he says.

The insurance industry, which always warned the pool would not solve the problem on its own, will wholeheartedly agree.

Insurers may even feel vindicated by the “reckoning” that has finally taken place.

But if they rest on their laurels, or say “I told you so”, community anger in the north could end up being directed at them, rather than the previous government.