An extension of the cyclone reinsurance pool cut-off to seven days after an event is downgraded could create a longer period of cover than is typical in international markets, federal MPs have heard. 

Australian Reinsurance Pool Corporation CEO Christopher Wallace told a parliamentary committee that internationally, insurers typically decide when the seven-day period begins once an event starts to have an impact.

The government-backed cyclone reinsurance scheme period is based on Bureau of Meteorology declarations, with cover extending throughout the time a cyclone exists to 48 hours after it is downgraded. Some insurers have called for the cut-off period to be extended to 168 hours.

“The consequence of changing that policy setting, from just a factual perspective, is that the pool would cover a greater period of cover than ... in the international reinsurance markets,” Dr Wallace told the Joint Select Committee on Northern Australia.

The pool is also unique in that it carves out a specific risk for cyclone for reinsurance. A change would reduce “some friction” for insurers around the interaction between cyclone and flood risks, he said, although there would be different boundary issues. 

Treasury officials said when the pool was established that insurers wanted a clear start and end date for cyclone events that was free of politics, leading to the use of Bureau of Meteorology declarations. The time limit was also part of a focus on improving affordability in areas at highest risk of cyclone. 

But committee acting chair Warren Entsch said cyclones are typically downgraded as soon as they cross the coast and current rules are excluding most of the related floods in following days, as shown by Cyclone Jasper last year.

The ARPC released modelling from Finity last year that showed pool average annual losses would increase by $20-$35 million if the cover period was extended to seven days.

Treasury assistant secretary Robb Preston told the committee that by extending the cover window there would be a redistribution of benefits, while declining to characterise whether changes would be significant or not. 

“I don’t think, though, that changing the 48-hour rule would lead to large improvements in affordability in general,” he said. “The benefits it would deliver of making that change would likely be felt most for properties that are most exposed to flood risk and likely reduce some of the benefits to wind risk.”

Any increase in the size of the pool could also affect the likely call on the government guarantee, he said.

Mr Preston said a change would be “a matter of judgment” and a legislated requirement for a cyclone pool review is scheduled for the second half of this year.

“That will be an opportunity to more thoroughly ventilate some of the issues that have been canvassed today,” he said.

The Australian Competition and Consumer Commission told the committee this year’s price monitoring report for the scheme will be the first where all required insurers are participating, and will provide a clearer picture of its impact.

“I don’t think it is fair to say the pool hasn’t delivered, I think we are still seeing that process play out,” GM insurance monitoring Michael Eady said.

The ACCC completed a northern Australian insurance affordability and availability report in 2020 and made 38 recommendations, which did not include a cyclone pool. Mr Eady said the commission believes many of those proposals remain valid.

“In our view, the cyclone pool alone will not solve the very acute insurance affordability challenges facing some people in northern Australia,” he said.