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Starting gun fired on cyclone pool design discussions

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After a decade of governments spinning their wheels on the idea of a cyclone reinsurance pool, Treasury now has to speed ahead with its foot to the floor in turning the concept into reality within an expected one-year timeframe.

A Treasury-led Cyclone Reinsurance Pool taskforce held a preliminary roundtable with insurers on Friday to gain some feedback before a relatively short June 18 deadline for submissions on its recently released consultation paper.

At the same time, a separate Expert Advisory Panel is being established and just about any organisation remotely connected to the issue wants to be involved in some way before details become set in stone.

The Federal Government has promised that the pool, backed by a $10 billion government guarantee, will begin covering cyclone and related flood damage from July 1 next year, suggesting the industry faces a short lead-time and transition period for the introduction of a major reform.

Insurers that have commercial reinsurance programs renewing on a calendar year basis would want to have insight on how that might be affected well before next year’s deadline.

Much remains up in the air, from the basic question of defining “cyclone and related flooding” and small business, to how the reinsurance product should be priced and designed and how to ensure the pool actually reduces premiums paid by policyholders.

Some of the questions were explored at a Senate Economics Legislation Committee Estimates hearing in Canberra last week, including whether the pool could be cost-neutral to government and what it might have to pay upfront.

“It will depend very much on the incidence of cyclones,” Treasury Deputy Secretary Markets Group Meghan Quinn said.  “If an event happens in the first year it may well be that this has an impact on the government's budget. But over time it's intended to be cost-neutral.”

The Northern Australia Insurance Premiums Taskforce final report delivered in 2016 focused on a reinsurance scheme charging sufficient premiums to cover the estimated long-term cost of claims and operating costs but with the risk of additional claims, resulting from more severe or frequent cyclones, covered by a Government guarantee.

It found a 50-60% chance the Government guarantee would be called on at least once, and a 5-10% chance the scheme over a 10-year period could cost the Government more than $5 billion. It also pointed to options such as the scheme purchasing its own reinsurance or retrocession to reduce the risks of large calls on the guarantee.

The aim of the reinsurance pool, as announced last month, is to reduce premiums across northern Australia by more than $1.5 billion for households, strata and small businesses over 10 years, which would equate to an average passed-through reduction of 10%.

“The 10% is from preliminary analysis based on actuarial analysis of the market, the volume of reinsurance, the possible premium reductions through design of the scheme, but it's all preliminary,” Ms Quinn told the Senate committee.

“It's not a cap on the amount of reductions by any means. There are parameter shifts that could push that up or down.”

Queensland Labor Senator Nita Green pressed for details at the hearing on whether consumers would see an immediate benefit from July next year.

Ms Quinn says it’s the Government’s intention that the reduction in premiums occurs as fast as possible, but the timing will depend on design parameters.

“It will also depend on what current reinsurance arrangements insurers have in place and what the transition is from current contractual arrangements to a reinsurance pool run by the Government,” Ms Quinn said. “We don't know the answer precisely to that question now. These are questions that are being worked through over the next few months as we design the scheme in more detail.”

Friday’s roundtable with insurers also raised the issue of how the reinsurance pool could encourage risk reduction, which is of benefit of everyone involved given the Government guarantee would mean it also now has additional skin in the game when it comes to mitigation.

Raising another complex issue, the consultation paper asks how the scheme design could provide incentives for state and territory action on insurance affordability, in a context where taxes and duties on premiums provide a major insurance cost impost and disincentive.

The Northern Australia Insurance Premiums Taskforce in its review warned of the potential for some uncertainty and friction for insurers as they seek to incorporate cyclone risk reinsurance with their current arrangements.

It also flagged that a mechanism to monitor pass-through of savings might be needed and that the Government will need to be aware that once having started a pool, it may be difficult to end the arrangement.

“Overseas experience demonstrates that withdrawal from any subsidy scheme is very difficult,” it said.

The Treasury-led taskforce can safely assume there will be no shortage of groups looking to assist with answers to the myriad of questions in the current process and it has the benefit of feedback to past inquiries. But there will be little time for lengthy contemplation and there will need to be some quick decisions if it’s to meet the Government’s timeframe.