The Federal Government has released cyclone reinsurance pool draft legislation that shows it will be compulsory for insurers with eligible risks to participate in the scheme after a transition period.

The pool, backed by a $10 billion Government guarantee, will provide cover for residential, strata and small business property insurance policies from July, while business marine cover will be further developed and included from the middle of the following year.

Insurers are expected to start entering into reinsurance arrangements with the Australian Reinsurance Pool Corporation (ARPC) next year, with large insurers required to have joined the scheme by December 31 2023, while small insurers will be given an extra 12 months.

“The pool will improve the accessibility and affordability of insurance for households and small businesses in cyclone-prone areas across Australia,” Assistant Treasurer Michael Sukkar says in a statement.

“Mandatory participation will ensure the reinsurance pool provides the greatest possible reduction in premiums.”

Treasury has called for submissions on the draft legislation by December 17 as the Government faces a tight parliamentary timetable to pass the laws, given a federal election is expected by late May.

The Insurance Council of Australia says it has “engaged constructively” with Treasury since the pool was announced in May, and the industry will now need to investigate and test how the model will operate to drive down premiums and improve cover availability.

“We recognise that it is one part of the solution to improving affordability and availability of insurance for those living with the threat of cyclones in northern Australia,” CEO Andrew Hall said. “We look forward to ongoing work with the Government and the ARPC on the consultation.”

The pool will cover claims for cyclone and related flood damage arising during a cyclone event, lasting from the time a cyclone begins until 48 hours after it ends, based on Bureau of Meteorology advice.

Treasury says the pool will cover all of the cost of eligible cyclone and related flood damage claims above the policyholder excess from July to June 30 2025 “to support insurer transition and maximise the potential premium reductions through the pool”.

From then, the pool will operate on a risk sharing arrangement with insurers where the pool will continue to cover a significant proportion of eligible cyclone and related flood damage claims.

The cover includes wind, rain, rainwater, rainwater run-off, storm surge, and riverine flood damage arising from a cyclones anywhere in Australia, including Norfolk Island, Christmas Island, Cocos (Keeling) Islands and related coastal seas.

Premiums that insurers will have to pay will be set by the ARPC with assistance from the reviewing actuary.

The Government says the annual reinstated $10 billion guarantee will be drawn upon if pool funds and ARPC resources are insufficient to meet claims costs, and a mechanism will also be in place to potentially increase the backing, after consultations involving the Prime Minister, Treasurer and Finance Minister.

“This mechanism addresses the risk that the $10 billion Commonwealth guarantee cannot meet all claim costs in the event of one or series of large but rare cyclones in any annual period and accounts for growth of the scheme and inflationary factors over time,” the explanatory materials say.

The Government says it will provide $18.4 million over five years to the Australian Competition and Consumer Commission to monitor pricing and whether reinsurance savings are being passed through to policyholders.

More information is available here.