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An exercise in pragmatism, not politics

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Northern Australia is a vast area that conservative politicians have long seen as a potential El Dorado for the nation. What the Liberal Party calls the “last frontier” for development is already home to massive resources projects that lead the world in supplying iron ore and liquefied natural gas.

Governments have long planned to develop the 3 million square kilometres of Australia north of the Tropic of Capricorn, an area encompassing much of Queensland and WA, plus the NT. But infrastructure projects to aid development in the region have been piecemeal.

The last major government project in the north was WA’s Ord River dam in 1971, which formed the 1000-sq-km Lake Argyle and its associated irrigation scheme.

Now it’s the turn of the Abbott Government to make the development of northern Australia a keynote project. Having weathered its internal political storms, the Government is pulling out all the stops to have a white paper on developing the region available by next month.

Since May 8 it has announced a $100 million plan to improve the region’s beef roads; an audit of infrastructure; provision of $40 million to improve airstrips and air services; another $15.4 million to research tropical diseases; and $5 billion for a facility providing concessional loans to build ports, pipelines and electricity and water infrastructure.

The plan is to have northern Australia become a “food bowl… which could help to double Australia’s agricultural output”, as well as increasing tourist numbers to 2 million a year and building a $150 billion clean energy export industry, presumably to help meet the inevitable fall in coal exports.

Almost lost in the sudden, frantic burst of activity leading up to last week’s federal budget was the formation of a northern Australia insurance premiums taskforce, a body charged with exploring options for reducing home, contents and strata premiums in the region.

The taskforce may appear to be a sideshow in the grand development drive, but it’s an important component of the Federal Government’s plans because there is a growing realisation that nothing happens without insurance.

Premiums in northern Queensland, where the insurance debate is most heated, are five times higher than in Sydney and Melbourne for strata insurance and 2.5 times higher for home insurance. Home and contents premiums in north Queensland have risen 80% since 2005, compared with a national average rise of 25% over the same period.

The reason is the seasonal cyclones that strike many areas of northern Australia, devastating population centres and causing extensive floods. These regular catastrophes may help explain why, after more than 200 years of growth, only 1 million people choose to live in northern Australia – and most of them are in cyclone-prone coastal centres.

The taskforce is the latest chapter in a long-running saga involving the cost of insurance in the region. Along the way, the Federal Government has established a more sophisticated understanding of insurance and its role. Ministers are now well aware, thanks to two studies by the Government Actuary, that insurers are charging appropriate premiums on the region’s property risks.

Catastrophes happen elsewhere in Australia, but the Government Actuary has pointed out that while storms cause the worst losses for insurers in dollar terms, the costs are spread across a large number of policyholders in many regions. Cyclones, by contrast, mostly occur in northern Australia.

There have been unfortunate stumbles as bureaucrats and politicians sought solutions to the insurance affordability issue. A proposal to open the region to unauthorised foreign insurers – a plan that horrified the prudential regulator as well as insurers – hasn’t progressed far.

The comparison website set up under the auspices of a reluctant Australian Securities and Investments Commission only compares the basic pricing formulas of various insurers, and does little more than confirm to consumers that property insurance in northern Australia is indeed very expensive.

The insurers, for their part, continue to insist the solution lies in strengthening buildings to resist cyclones and constructing levees to protect against floodwaters. Less damage means lower premiums – it really is as simple as that. Some insurers, most notably Suncorp and CGU, are undertaking their own research and engineering programs to help customers strengthen their buildings.

The Government taskforce is being led by former Federal Treasury executive Mike Callaghan, who will lead a team of public and private sector members to make recommendations by November on the best way forward.

This group is supported by a “reference panel” of experts representing the insurance industry, consumers and government. The industry representatives are Insurance Council of Australia CEO Rob Whelan and National Insurance Brokers Association CEO Dallas Booth.

As the old saying goes, if you don’t have a seat at the table you’re probably on the menu, so the fact the Government is seeking to involve the industry in finding a workable solution indicates a turn away from merely attacking the industry.

The focus now is on the possibility of setting up a mutual insurer, with a mutual insurance expert appointed to provide advice to the taskforce. The other option is a cyclone reinsurance pool, with the Australian Reinsurance Pool Corporation – set up in 2003 to handle terrorism risks – responsible for input.

Assistant Treasurer Josh Frydenberg says the taskforce will explore options “that use the Commonwealth balance sheet to reduce home, contents and strata insurance premiums in those regions of northern Australia that are experiencing insurance affordability concerns due to cyclone risk”.

The Government’s willingness to bankroll an insurance scheme is worrisome. As the Productivity Commission pointed out in its draft report late last year, international experience has shown government intervention is overwhelmingly ineffective and creates a moral hazard as well as financial risks.

Among the group’s tasks will be establishing “how the role of the Government can be gradually reduced over time”. That will be a major challenge.

The concept of a mutual insurer – a proposition championed by north Queensland MP Warren Entsch – may fail to get up with the taskforce once it has the opportunity to weigh up potential claims against the size of the pool of potential policyholders.

It’s an equation that could see the Government having to provide considerable supporting capital if a cyclone passes through a large population centre such as Cairns.

A reinsurance pool could be more feasible, although considerable reinsurance for cyclone risks would be needed initially. And while it would be readily available in the present market, it wouldn’t necessarily be cheap.

And as with the terrorism pool, the Government would probably still have to provide financial guarantees for any amount over the reinsurance limit.

Many observers have pointed to New Zealand’s Earthquake Commission (EQC) as an example worth examining. The EQC applies a levy on policyholders to cover a major part of the risk, and also runs a large global reinsurance program. The Government still stands as the guarantor of any above-limit payments.

The EQC pays the first $NZ100,000 ($92,735) of a house claim and $NZ20,000 ($18,547) for contents. It then passes any additional payment to the private insurers, which have so far paid $NZ15 billion ($14.14 billion) to settle claims since the Canterbury earthquakes of 2010/11.

As experience has shown, it works well on paper but it’s a cumbersome and time-consuming process after a major disaster like Christchurch.

Whatever solution the taskforce comes up with, the industry is expected to stick to its guns.

It doesn’t see the situation in northern Queensland as an example of market failure. Insurance is available, but at a premium that matches the risk.

Building in resilience to cyclones is the step most likely to achieve what the Government seeks: lower property premiums. The Federal Government has provided an example of this in the Federal Budget, allocating $12 million to the National Insurance Affordability Initiative for the 2015/16 financial year.

All the funds will be spent in Queensland, for a new flood levee in Roma and improved flood defences in Ipswich.

While rebuilding or repairing deficient buildings after a cyclone is often an exercise in futility, older buildings can be made less vulnerable and more economically insurable.

And new buildings do over time replace old ones – and they are built stronger. Towns such as Karratha and Port Hedland in WA have demonstrated every year for more than 30 years that communities can survive severe cyclones with little damage when homes have been built to withstand them.

Cyclones are a fact of life in many parts of Australia’s north, and that isn’t going to change. If northern Australia is to develop over the next 15-20 years to meet the politicians’ ambitious plans, the Government’s taskforce must provide workable long-term solutions to the insurance affordability issue.

Band-Aid solutions won’t work. Insurance affordability in northern Australia – and northern Queensland in particular – is about practicality and pragmatism, not politics.