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Reinsurance pool draft bill leaves 'critical gaps'

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The Northern Australia Insurance Lobby (NAIL) says holiday rental developments and other properties in Australia’s north may be left uncovered by the cyclone reinsurance pool, based on draft legislation released last week.

NAIL Co-Chairman Tyrone Shandiman says strata buildings with at least 20% commercial use would not be covered, causing issues for holiday-letting in popular destinations in the north.

“For Hamilton Island, which is the epicentre of the problem for insurance, most of the buildings won’t be covered if this legislation is passed,” he told insuranceNEWS.com.au.

Mr Shandiman says there is uncertainty about how the pool commercial use eligibility covers might apply, but in many cases a $5 million sum-insured limit would be too low, affecting properties such as aged care facilities.

The Australian Reinsurance Pool Corporation (ARPC), which provides terrorism cover, will administer the cyclone pool and charge premiums to insurers according to a formula yet to be outlined.

“We are not sure how the terrorism pool is actually billing insurance companies, and that is going to be critical to working out what the actual saving is,” Mr Shandiman said.

Treasury has called for submissions on the draft legislation by the end of next week, after developing the project with input from an industry expert advisory panel and a separate non-technical panel that included representatives from people living and working in the north.

The National Insurance Brokers Association (NIBA) says it has played an active role in providing feedback to find a solution to help make insurance more affordable and available for individuals and small businesses in the impacted areas.

“We will assess the detail in consultation with our members in northern Australia and look forward to providing our feedback over the coming weeks,” CEO Phil Kewin told insuranceNEWS.com.au.

The mandatory reinsurance pool for cyclone and related flooding, backed by a $10 billion Government guarantee, is set to come into effect from July 1, assuming legislation is passed next year.

Treasury says the pricing formula will be finalised before then, but broadly ARPC must have regard to the objective of lowering premiums for households and small business in cyclone prone areas and it will not charge a profit margin. An actuary will review premiums before they are set.

The Insurance Council of Australia says insurers will need to investigate and test how the model will operate to drive down premiums and improve availability for cyclone and cyclone-related flood

“We recognise that it is one part of the solution to improving affordability and availability of insurance for those living with the threat of cyclones in northern Australia,” CEO Andrew Hall said.

“To create a long-term and sustainable market for insurance, more must be done at all levels to lower the physical risks by improving resilience standards in building codes, reform of unfair state insurance stamp duties and levies, and making better land planning decisions into the future that factor in the climate impacts.”

Parametric cyclone insurance provider Redicova, which launched last month with the aim of delivering fast recovery cash after an event, says the Government-backed pool is beneficial, but does not address areas such as agricultural crops and large businesses.

“Many details are yet to be disclosed and the savings to be made by constituents have not yet been finalised,” MD Karen Hardy said. “The reinsurance pool will address only a part of the problem. The remaining issues of uninsured risk, excess, the delay between event and claim settlement, are not within the Government remit.”

See ANALYSIS.