Four Ways to generate premium savings for consumers - Cyclone Reinsurance Pool

Following the 30th June announcement by the Hon Stephen Jones MP advising promises of premium savings associated with the Cyclone Reinsurance Pool made by the previous Government will not be met, ACIL have concerns the Cyclone Reinsurance Pool will not generate the savings needed for impacted regions.

ACIL believe savings advised by the previous government of up to 46% (including savings for strata properties up to a 58% and SMEs up to a 34%) are still needed to deal with the issue of affordability and availability of insurance in Northern Australia.

The reinsurance pool is administered by the Australian Reinsurance Pool Corporation (ARPC) and we believe there are four possible ways the Federal Government could make up shortcomings of previous government policy.

Greater Cross Subsidisation

One way the ARPC may achieve greater savings for consumers in Northern Australia is through greater cross subsidisation. Currently properties in rating band A which are not deemed to have a cyclone risk have a rating of 0.000 meaning they do not contribute into the reinsurance pool.

If the ARPC were to increase the rating to 0.005% (cost impact $25-$35 on a property of $500,000). This would provide a significant premium contribution to the $867million annual premium pool the ARPC are trying to achieve and the additional cost for buildings with no cyclone exposure would have a negligible impact on consumers.

Government Subsidies

The government could reduce insurance costs by subsidising the reinsurance pool – for example if the government were to contribute $200million p.a. out of consolidated revenue to the reinsurance pool, this would make a great impact on consumers. The funds could be allocated to those in the highest rating bands paying the highest premiums.

ACIL does not believe this is a sustainable long-term solution but given the Federal Government have raised concerns about the savings generated by the reinsurance pool, it may be a quick fix to provide immediate relief to policy holders while they are working out how to make the reinsurance pool more fit for purpose for consumers.

Mitigation

Another way the premium burden can be minimised is through mitigation. That is, reducing the claims for the reinsurance pool, thus reducing the amount of premiums required to be collected.

One of Australia’s leading insurers, Suncorp, recently stressed the need for more action on mitigation.

While mitigation measures should be considered by Treasury and the ARPC, more work needs to be done to demonstrate the cost/benefit to consumers and whomever will pay for the mitigation - for example it may be difficult to demonstrate the benefit to a consumer of spending $30,000 re-roofing a property (subsidised or not) for a premium saving of $500 – but such spending may generate a saving/benefit for the reinsurance pool.

Removal of State/Territory Stamp Duties & Levies

Stamp duties and levies collected by State Governments increase the cost burden on consumers, particularly those that are paying unaffordable premiums in the first place.

The introduction of GST was supposed to mean the end of state-based taxes and duties. For insurance, State Governments have received GST revenues, Stamp Duties &/or Levies – GST is applied to premiums, stamp duty and levies which is therefore tax on tax on tax.

The removal of stamp duties and levies would have a great impact (as much as 40%) on savings to impacted consumers.

ACIL have written to the Hon Stephen Jones MP on whether the reinsurance pool in its current form is adequate for consumers. If not, we have asked him to share his views on how the Federal Government may make changes to make the reinsurance pool more fit for purpose.

Reinsurance Pool Modelling Yet to be Fully Released

Following the 30th June announcement by the Hon Stephen Jones MP promising to release of the Cyclone Reinsurance Pool modelling, consumers are no closer to understanding the impacts the Cyclone Reinsurance Pool will have on premiums due to Treasury not releasing important aspects of the modelling.

The Federal government have released rating bands for the Cyclone Reinsurance Pool, this information is available in the Finity report released in early July (Click Here).

The rating released has 23 rating bands A to W based on suburb/post code – Treasury have released the rates but are yet to release information on what rating bands apply to which suburbs/post codes. Without this information consumers are unable to understand the reinsurance rates that apply to their property.

ACIL wrote to Treasury from 1 st July to 19th July seeking further clarification of the modelling and we have been advised Treasury are now planning to build a secure online calculator for individual addresses, that consumers will be able to access through the ARPC website. ACIL have been advised that building this calculator is likely to take approximately two months, subject to availability of staff and other resources.

“Consumers are eager to understand the impact the reinsurance pool will have on the cost of insurance. The Federal Government have information on ratings applicable to location available that can be released but are yet to release it. Releasing this information may help relieve cost of living pressures by those in Northern Australia so we wonder why little priority is given to releasing this information. We believe the immediate and timely release of this information is important to provide for greater clarity and transparency of the reinsurance pool.” ACIL Chairperson Tyrone Shandiman said.

ACIL wrote to Stephen Jones MP on 22nd July asking that Treasury release the full modelling or provide further clarification as to why the Federal Government were withholding the release of rating bands that apply to the varying suburbs. ACIL are yet to receive a response.

What does the Modelling released say so far?

The modelling released by Treasury provides the following information:

• The Federal Government want to collect $867million per annum in premiums to fund the reinsurance pool.

• QLD, NT, WA and a small portion of NSW (North of Port Macquarie) will contribute to the reinsurance pool. With no contributions made by VIC, ACT, SA, TAS and the majority of NSW (south of Port Macquarie).

• The maximum standard rate for Wind risks is 0.5000 for every $100 insured. This translates to $500 for every $100,000 insured + GST + Stamp Duty & Insurers Margin (say $600-$700)

• The maximum standard rate for Cyclone related flood risks is 0.1000 for every $100 insured. This translates to $100 for every $100,000 insured + GST + Stamp Duty & Insurers Margin (say $120-$140)

• The maximum standard rate for Cyclone related Storm Surge risks is 0.0500 for every $100 insured. This translates to $50 for every $100,000 insured + GST + Stamp Duty & Insurers Margin (say $60-$70)

• Loading and discounting will apply to standard rates for a range of risk factors including but not limited to sum insured, excess, wall & roof construction, age of property & number of stories.

• The premiums shown above are in addition to the insurers standard premiums for all other perils (such as fire, accidental damage, earthquake etc).

Reinsurance Pool Modelling

Australian Consumers Insurance Lobby Inc (ACIL) are concerned about reports from Assistant Treasurer Stephen Jones MP suggesting promises of premium savings associated with the Cyclone Reinsurance Pool made by the previous Government will not be met.

The new Federal Labor Government will shortly release modelling used to design the previous government’s Cyclone Reinsurance Pool and they believe savings promised are unachievable.

ACIL response to Modelling

• ACIL are disappointed to hear this news and we believe:

• savings advised by the previous government of up to 46% (including savings for strata properties up to a 58% and SMEs up to a 34%) are still needed to deal with the issue of affordability and availability of insurance in Northern Australia.

• If immediate fixes cannot be applied, the implementation of the Cyclone Reinsurance Pool should continue if it generates a positive outcome for consumers.

• a cyclone reinsurance pool is an appropriate mechanism to address affordability of insurance in Northern Australia.

• the modelling of the Cyclone Reinsurance Pool must continue to be refined to ensure that the Cyclone Reinsurance Pool meets its purpose.

• The legislated 3-year review of the reinsurance pool is not sufficient. A review of the reinsurance pool after 12 months must take place. This was agreed by the former Assistant Treasurer under their ministerial discretion and we will be seeking similar assurances from the new Assistant Treasurer Stephen Jones MP.

• the new government must work with the ARPC and all stakeholders to address the affordability crisis for insurance.

“We did have some reservations about whether the modelling associated the reinsurance pool stacked up when we were advised by Treasury the final reinsurance program would not be released to insurers until after the federal election in late May. The timing seemed somewhat unusual given feedback provided by insurers suggested this did not provide insurers enough time to implement the Cyclone Reinsurance Pool to consumers at the “household level’ on the 1 July rollout. Irrespective of the actions of the past government, the new government has a role to play in getting the Cyclone Reinsurance Pool right for policy holders. ACIL are passionate about a review of the Cyclone Reinsurance Pool after 12 months. We wrote to Anthony Albanese in April seeking commitment of a 12 month review, although this was not responded to we are following this up with the new government. It is clear the Cyclone Reinsurance Program will need updates to ensure it is fit for purpose for consumers”