The Northern Australia Insurance Premiums Taskforce has come out strongly against government intervention in the cyclone-prone region’s insurance market.

The taskforce was asked to consider ways to reduce premiums in the north, but in identifying the “most feasible” options it admits “there is no simple answer to sustainably reducing” prices.

However, it says government intervention in the market is not the answer.

Instead, the taskforce’s final report recommends cyclone mitigation as the only way to reduce insurance premiums on a sustainable basis.

In the meantime, it believes market forces are coming to the rescue of consumers who are slugged with premiums 1.5-2.5 times more than policyholders in Brisbane, Sydney and Melbourne.

The taskforce report notes some “positive developments” in the north, with insurers introducing products that “provide greater scope for consumers to achieve lower premiums”.

“The aim should be to enhance this momentum,” the report urges.

Ultimately, the taskforce believes responsibility for reducing premiums falls to householders as much as insurers.

“The reduction in premiums that could be achieved from mitigation will depend on individual circumstances and the mitigation action taken.

“However, such reductions can only be achieved by household action.”

Governments, for their part, can take “a range of relatively low-cost… measures to promote mitigation”.

These include additional funding for research on mitigation options, public works spending, subsidising mitigation work for low-income households and education campaigns “to encourage and support property owners to undertake mitigation”.

Having acknowledged recent product innovation, the taskforce urges the insurance industry to go further in reducing premiums.

“The… industry should develop insurance pricing systems that provide greater recognition of mitigation action and be more proactive in offering a range of policy options that provide increased scope for policyholders to assume more responsibility for risk of cyclone damage in return for lower premiums,” the report says.

The taskforce recommends the industry “engage more effectively” with property owners in the north.

“This requires improved disclosure of risks and greater responsiveness to policyholder concerns.”

Proposed options for a mutual or reinsurance scheme do not appeal to the taskforce, although the latter “represents a more feasible approach”. The taskforce dismisses a mutual outright.

“In contrast to the mutual, the reinsurance pool could promote competition through new entrants to the northern Australia market. A reinsurance pool that charged premiums to cover the estimated long-run cost of claims from cyclones and was supported by a government guarantee might offer a premium reduction for consumers of 10-15%.”

But the taskforce also identifies a catch.

“It would be difficult... to ensure cost reductions for insurers did in fact flow through to premium reductions for customers. The Government would assume significant risk to achieve any reduction in premiums.”

The taskforce says, compared with a mutual, there is greater potential for the Government to withdraw support for a reinsurance pool, but overseas experience shows it is very difficult for governments to exit intervention in insurance arrangements.

“If the Government did exit the market, any premium reductions would be reversed unless households had undertaken mitigation during this time.”

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