The Australian Reinsurance Pool Corporation (ARPC) recently welcomed a report which found its Cyclone Reinsurance Pool has started delivering lower premiums in areas facing higher cyclone risk.
The report, by the Australian Competition and Consumer Commission (ACCC), showed modest progress: less than one third of home and contents policies bought through an insurer signed up to the cyclone pool showed premium reductions.
On the same day – last Friday – Tyrone Shandiman appeared before a government Senate committee. The public hearing was looking at the Impact of Climate Risk on Insurance Premiums and Availability.
“There is a cyclone reinsurance pool,” said Shandiman, who chairs the Australian Consumers Insurance Lobby (ACIL). “It is a very big source of frustration for our organization because we feel it is not established properly and set up appropriately.”
However, ACIL, together with other industry stakeholders, does believe that this government-backed pool can be a good solution for leveling out premiums costs and reducing the current big disparities between high and low risk policyholders.
Shandiman highlighted the problems.
“Right now, it is modelled similar to a user pay system,” he said. “In fact, it’s worse.”
He said only policyholders north of Port Macquarie contribute to the pool but the pool covers cyclone risks across the whole country.
“So effectively, anyone south of Port Macquarie is getting free insurance for cyclone,” said Shandiman.
Until recently, many Australians would have regarded the idea of a cyclone threat to NSW as somewhat extreme. Labor Party Senator Tony Sheldon – the deputy chair of the committee – astutely asked if Australians south of Port Macquarie are at risk of cyclones?
“We’ve provided the ARPC and Treasury with historical data which shows that a cyclone hit Sydney in 1950,” he said. Shandiman said, over the years, a series of cyclones have hits areas south of Port Macquarie.
The worst, according to the report, was in January 1950 when a category 1 cyclone reached Sydney. Ten people died.
Meteorologists say, for the first time in decades, the Pacific weather pattern that can cause cyclones to strike as far south as Sydney - the Interdecadal Pacific Oscillation (IPO) – now resembles the 1950s.
“Our greatest concern with the way the pool was modelled is that if there was a cyclone that hit Sydney and Northern Australia was covering that cost, there’s going to be uproar up north,” said Shandiman.
He also said the ARPC doesn’t factor in this important historical data, or the potential that a cyclone in the near future could strike much further south.
The ACIL chair said one way to take this risk into account would be to increase the cost of premiums for people south of Port Macquarie by $20 and use it to help reduce the premiums of northerners.
“So the first thing we think this inquiry should explore for some of these affordability issues is the establishment or the expansion of the cyclone reinsurance pool,” said Shandiman.
However, that’s an issue that attracts divergent views.
Another cyclone pool issue is its 48-hour window to make a claim. This cuts out property damage claims from storms and floods caused by the cyclone but occurring days after the cyclone officially ends.
A leadership team from the Actuaries Institute Australia also appeared at the hearing. CEO Elayne Grace (pictured above) was asked for her agency’s view on whether the cyclone pool should be expanded to cover other climate disasters like floods?
“There’s no doubt that a lot of the affordability issues are coming from flood and that needs to be tackled,” said Grace.
However, she said the cyclone pool model couldn’t be used because of the larger number of people impacted by flood.
Nicholas Scofield, chief corporate affairs officer for Allianz Australia, explained the recent history of flood covers. Flood covers, he said, weren’t actually available in Australia until 2008 when Suncorp started to offer them. Allianz followed, he said, in 2012.
“Then it went from being an availability issue to an affordability issue,” said Scofield.
Which means for the Brisbane flood in 1974 – one of the worst ever impacting thousands of homes – no-one had flood insurance. Very few home owners in Brisbane, he said, had it for the more recent record flood in 2011.
Flood coverage continues to be very expensive.
Data presented at the hearing showed that a home worth $500,000 in a flood zone would need to pay about $45,000 annually for home and contents insurance with flood coverage.
Which is why, said Scofield, in 2011 his firm called for a government-backed reinsurance pool to deal with floods and continues to hold that position.
“A mechanism like a reinsurance pool provides an ability to effectively deliver a funding mechanism that is targeted to people with a real problem and to provide them access to insurance in an affordable way which is why we would advocate for that,” said James Fitzpatrick (pictured immediately below), Allianz’s chief data officer.
Fitzpatrick also said this solution should include using some of the funding to rebuild flooded homes in safer locations. He said the current insurance-backed model of buying flood insurance and building back in the same location needs to change.
“I think the critical piece for us is actually about how do we respond and create an intervention so that this problem does not persist permanently,” said Fitzpatrick.
However, Fitzpatrick said the funding model used by the cyclone reinsurance pool is not adequate to deal with flood. He said his firm doesn’t hold a fixed position on how to source its funding.
The cyclone pool, said the Allianz data chief, is doing very little to make insurance more affordable.
“The cyclone pool, where we look at the delivered outcomes from that, while we can see some that are reasonable in terms of the savings for the proportion of the risk, it’s a very modest amount,” said Fitzpatrick.
Is the cyclone pool working? Should there be a government-backed pool for flood insurance? Please tell us your views below
