Home / Daily / Winds of change: insurers think again on reinsurance pool
19 November 2019
Did the insurance industry really agree on Friday to help investigate a government-funded cyclone reinsurance pool – something it’s been fighting against for years?
Yes, it did. But as illogical as it may seem, there are several reasons why.
The idea that a pool could be the solution to sky-high premiums in exposed areas of northern Australia is nothing new. A swag of official reports have considered (and for the most part rejected) the idea, most notably the Northern Australia Insurance Premiums Taskforce in 2015.
The industry has consistently argued that a pool isn’t the answer, because government intervention would skew a functioning market and perhaps encourage inappropriate development. It would also be a huge financial burden on the Government.
The industry has always favoured mitigation, saying it’s the only way to sustainably reduce the risk, and premiums along with it.
The argument was trotted out as recently as July, when the Insurance Council of Australia (ICA) responded to an interim report from the Australian Competition and Consumer Commission (ACCC).
The ACCC is in the middle of a three-year inquiry into premium affordability in northern Australia, and earlier this year asked for feedback on reinsurance pools, mutuals and direct government subsidies.
This sparked a rebuke from the ICA for revisiting “flawed ideas” that have failed elsewhere in the world.
“Insurance in northern Australia should not be subsidised by the rest of the nation; this would be unfair and unsustainable,” CEO Rob Whelan said.
So how, just a few months later, have we reached a point where ICA releases a statement confirming insurers have “agreed on preliminary work with Government and Treasury to explore the feasibility and potential effectiveness of a government-funded cyclone reinsurance pool”?
And why has such an agreement been reached before the much-heralded ACCC inquiry has even finished? Its final report isn’t due until November next year.
It’s complicated. But a picture has started to emerge of the industry having to deal with a sudden storm of external and internal factors, and a government intent on finding answers right now.
The Federal Government has come under pressure after another round of sharp premium increases – in line with premium rises around the country – with vocal Queensland MPs convincing Prime Minister Scott Morrison that immediate action is needed.
Assistant Treasurer Michael Sukkar was dispatched to “sort it out”, and Friday’s meeting in Townsville with insurance company CEOs was arranged.
Mr Sukkar spoke candidly in the run-up to the meeting, confirming there was no way he was going to wait for the ACCC’s final recommendations. Which does beg the question: What’s the point of commissioning a three-year inquiry you’re not going to listen to?
“It’s not an acceptable situation that people [in north Queensland] are unable to get insurance or are effectively priced out of the market,” Mr Sukkar told journalists in Townsville. “That’s my starting point.
“I understand that time is of the essence here. I think people are sick of reviews and committees and reports – this sort of endless cycle of navel-gazing at the issue."
No one in the insurance industry is going to argue with that, although they might be more worried by his comment that the Government will be “as light-touch or as heavy-handed as we have to be”.
The aim is that north Queenslanders have access to affordable insurance, and anything goes in order to reach this goal. Mr Sukkar wants something to announce, and he wants it soon.
Under pressure and in the spotlight, how would the insurance industry respond?
As insuranceNEWS.com.au has reported, an ICA discussion document prepared prior to Friday’s meeting outlined specific mitigation projects and the premium reductions they would make possible.
It also flagged insurers’ willingness to sign a memorandum of understanding (MoU) guaranteeing minimum premium reductions if certain mitigation projects were carried out.
The MoU plan appeared to wither on the vine before the meeting even took place. Not long after insuranceNEWS.com.au reported on it, all references to the proposal were erased.
Putting this unusual turn of events to one side, the industry appeared to be heading to the showdown with the Assistant Treasurer with a “mitigation on steroids” plan of attack, but it perhaps was never going to be enough.
And then comes the twist.
The insurers haven’t always been entirely united in their opposition to a reinsurance pool. Allianz has long argued that – while mitigation is vital – a pool is needed to bring premiums down in the short term.
Just one dissenting insurer could be put aside as an anomaly. But insuranceNEWS.com.au understands Allianz now has a key ally in personal lines giant IAG.
Sources say IAG has become quite vocal in its support for a reinsurance pool in northern Australia. IAG declined to put anyone up for interview on the issue, but a spokeswoman has confirmed to insuranceNEWS.com.au that the insurer “sees merit” in a pool.
Suncorp, on the other hand, says its “long-held and well-documented concerns” about a reinsurance pool remain. It is more exposed than any other insurer to extreme weather risks in North Queensland.
Now it starts to become clear.
Renewed urgency sparked by growing community concern and outspoken MPs in vital seats for the Coalition. An edict issued by the Prime Minister himself. An ambitious minister determined to deliver a quick win. And an industry no longer presenting a united front.
Of course, a reinsurance pool might never happen. For all the tough talk, when push comes to shove the Government might not have the stomach for the harsh financial realities of a pool. We’re talking billions of dollars.
One other thing should be made crystal clear. The insurance industry remains 100% united on the importance of building resilience. Public mitigation, private mitigation, and better land-use planning will be vital as extreme weather events worsen under climate change.
There have been recent wins, with an extra $50 million announced for mitigation, and the fight will continue to make sure it’s well spent and that more funds follow.
But the barriers to government intervention are down, and nobody can be quite sure where all this is going.