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Reinsurance pool: will it work, and is it fair?

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The Federal Government’s $10 billion cyclone reinsurance pool has been widely and publicly welcomed by the insurance industry – but not so very long ago there was almost universal opposition.

As insuranceNEWS.com.au has reported, the Australian Competition and Consumer Commission (ACCC), in its final report on insurance affordability in northern Australia, decided against recommending a pool.

But in July 2019 the Insurance Council of Australia (ICA) berated the competition regulator for even considering it.

“The industry is disappointed that the ACCC is examining several flawed ideas – a government-backed reinsurance pool, mutual and direct subsidies – despite these options having been the subject of previous inquiries and found to be unviable and too expensive,” ICA said at the time.

As recently as last year, Suncorp told Insurance News magazine that “we remain unconvinced that a reinsurance pool will work”.

Allianz has long argued in favour of a pool, but the ACCC, in its report released late last year, says “the majority of the insurance industry opposed the introduction of either a mutual or reinsurance pool”.

insuranceNEWS.com.au has been told that, despite the revised public position, many within the industry still don’t support it.

Many believe the arguments that it won’t deal with the underlying issues, won’t substantially reduce premiums, and could mask pricing signals, are as valid today as they were a year ago.

Politicians hoping for a 50% reduction in premiums have been labelled “naïve”, with single figure reductions much more likely.

There could, of course, be good reasons for the insurance industry changing its tune.

The affordability issue has worsened in recent years, and political pressure has increased sharply with a Federal election looming, and some Queensland seats considered vital to the Coalition cause.

There comes a point where there’s nothing to be gained by continuing to oppose something that the Government, despite repeated recommendations to the contrary, is determined to do.

Of course, the Government also announced significant funds for mitigation projects, which might have sweetened the pill.

But there’s another concern – fairness.

It’s hard to argue that premiums are unaffordable for some residents in cyclone-prone regions. But they’re also unaffordable for many living on flood-plains, and in areas of high bushfire risk.

It begs the question: why are some Australians more deserving of support than others?

The Financial Rights Legal Centre, while welcoming efforts on affordability and mitigation, would rather the Government had taken more notice of the ACCC findings and delivered targeted subsidies.

“The Government’s plans to establish a cyclone reinsurance pool in northern Australia may not be the best approach to helping vulnerable consumers protect themselves and their assets against the devastating impacts of natural disasters,” Financial Rights Legal Centre Policy Officer Julia Davis told insuranceNEWS.com.au.

“Any taxpayer-funded scheme should apply nationally, not just in northern Australia. There are pockets of high natural disaster risk all over Australia.

“People living in the Hawkesbury region of NSW can no longer afford flood insurance while consumers on the South Coast of NSW are experiencing huge increases to home insurance costs in the aftermath of the catastrophic Black Summer bushfires in 2019/20.

“Access to subsidised insurance should be equitable and fair for all people across the country."

The ACCC report recommended against a government-funded reinsurance pool “on the basis that it would be expensive and not necessarily make insurance any cheaper”, Ms Davis says.

“Rather than spend hundreds of millions every year running a reinsurance pool, the Government would achieve far better outcomes by providing direct subsidies to low-income households in high-risk areas, in line with the ACCC’s recommendations.”

Insurers will now work with Treasury to finalise the design of the pool, which should be operational by July next year. As one industry commentator puts it, “they’ve surrendered” in order to gain a seat at the table.

But until that design is unveiled, predictions about how well the pool will work remain mostly speculative.