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.