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Reinsurance Pool Design - Challenges

As the Treasury-led Taskforce for the Federal Government backed Cyclone and Cyclone-related Flood Reinsurance Pool consultations kick into full gear, The Northern Australia Insurance Lobby (“NAIL”) believes several challenges are being brought to light in the design of the reinsurance pool.

While NAIL believes a reinsurance pool is a step in the right direction to resolving the issue of affordability and availability of insurance – the design of the reinsurance pool is critical for ensuring that the solution proposed by government is fit for purpose for policy holders in Northern Australia. Failure in design will mean that many policy holders will continue to have the same issues and problems that have been brought to the governments attention over many years.

Top design issues requiring Federal Government to address:

1. Strata Accommodation Module

Current discussions in Treasury Round Tables include consideration as to whether Strata Buildings which form part of an accommodation module including those under a company title and those under the corporations act (such as Hamilton Island) are to be included as part of the scheme.

NAIL believes it is imperative that the design of the reinsurance pool must include other Module buildings for the following reasons:

  • Northern Australia relies heavily on tourism;

  • Accommodation module buildings (particularly in Whitsunday region & on islands) have some of the heaviest increases in premiums – in some instances they are paying 20 times the premium of buildings in other parts of Australia.

  • Investors in accommodation module buildings are often Mum & Dad investors and not big corporations with deep pockets.

We spoke to Jeff Aquilina Managing Director of At Hotel Group who are the largest accommodation provider in Airlie Beach representing seven accommodation module buildings. “Considering management rights account for more than half of the accommodation sector in Queensland, it would have a significant impact on tourism if investors abandon the market due to the cost of escalating insurance. What we are finding is current lot owners in Accommodation Module buildings are seeing diminished returns on investment due to increased outgoings, driven by insurance, and many apartments that are normally used for short term accommodation are being purchased by owner occupiers.”

“The cost of insurance is making the outgoings impossible and unaffordable and is in turn having a significant impact on property values, impacting many mum and dad investors that make up 90-95% of our investors. At a complex we manage, over a seven year period the premium increased by 250% and we are told by sources in strata insurance that the premium is 7-8 times more than the cost of insurance in other parts of Australia. If Accommodation Module buildings under a strata title building are not included in the government backed reinsurance, holiday letting will become unviable for northern Australia – this will significantly affect the tourism industry.” Mr Aquilina Said.

2. Small business

Proposals put forward by the Treasury-led Taskforce suggests the reinsurance pool will limit cover to small businesses. Various stakeholders at Treasury Round Tables have put forward their concerns that this proposal can create a two-speed economy between small and large business. The concerns include:

  • Inequities can arise when a small business leases their premises from a landlord who is not considered a “small business”. If the insurance for the landlord does not fall under the reinsurance pool it can mean the cost of insurance is passed on to the tenant (i.e. small business) through higher outgoings or rent. Compare this to a small business that owns and occupies their premises and has access to the reinsurance pool which means the insurance cost associated with the building is lower.

  • The scope as being “small” business it would be a disincentive for a business to expand past a certain point in the future because it’s insurance would suddenly skyrocket.

  • When it came to mixed strata, this can include small and big businesses mixed with residential or accommodation strata and in this case splitting up what was covered by the pool and what was not would be extremely complicated.

“The high costs and inability to access insurance is prohibitive for those looking to invest in North Queensland which is stifling our region’s ability to grow and prosper. We have reached the point of ‘Market Failure’ whereby there is no sufficient and/or affordable insurance in Northern Australia. Access to insurance is imperative for Townsville and North Queensland to reach its full economic potential and essential to building resilient communities.” Townsville Enterprise CEO, Claudia Brumme said.

“The $10 billion reinsurance pool was a significant announcement with the potential to be a real solution to a decade long problem of rising and unaffordable insurance. However, it should not be defined for the purposes of eligibility - the scheme should cover all located within the areas designated for eligibility to the reinsurance pool. If the scheme is limited in its beneficiaries, it changes very little for our region that has kept the national economy out of recession. We are contributing $20bn to the national GDP and not having access to affordable insurance in all aspects of life is unacceptable and will hold back the entire prosperity of our country.”

3. Marine Insurance

Current discussions have focused on static property being covered by the reinsurance pool but affordability and availability of marine insurance in Northern Australia is also being brought to the forefront in round-table discussions.

NAIL believes it is imperative the reinsurance pool considers Marine Insurance in its scope.

We spoke to Sharon McNally Director of Cumberland Charter Yachts and QLD Council Member of Boating Industry Association (BIA) on the issue of Marine Insurance.

“Since Cyclone Debbie (2017) we have seen insurance premium increases of 40%-50%. In recent years, I have spoken to several different brokers for quotes each year and we are finding there are less and less insurers willing to cover us, last year 13 were contacted, all but one turned us down. Currently there is only one viable insurer that offers charter boat insurance in North Queensland and, if they stop providing insurance or continue to increase premium, it may no longer be viable for many marine businesses in North Queensland to continue operating.”

“If affordability and availability of insurance for the marine industry is not addressed as part of the Federal Government Reinsurance Pool many marine businesses will simply take their boats to other parts of Australia. Marine tourism is a vital part of the region’s economies in Northern Australia including the Whitsunday’s where Cumberland Charter Yachts is based. People travel the world for bareboating experiences and if there are no bareboat operators (like my business), those tourists will find other holiday destinations, like Fiji, Tahiti and the Med.”

The flow on effect of a contraction in marine business in Northern Australia is significant for towns dependant on the marine industry. The Federal Government needs to consider not only marine businesses but the many businesses that service the marine industry and rely on the marine industry to remain in Northern Australia.

4. The Actual Saving

The actual saving generated by the re-insurance pool will be another test for the success.

A building paying 20 times the cost of insurance in Northern Australia will not see a material benefit if the premium saving is only 10%.

NAIL believes if the actual cost saving isn’t on average 40%-60% for the most impacted policy holders the reinsurance pool will not meet the needs of the policy holders..

“In North Australia strata insurance in particular is out of control, with complexes now being legally underinsured against legislation and more cases being referred to the BCCM Commissioner every day. We have market failure and it has to be properly addressed, I’m hoping this Cyclone Reinsurance Pool, designed properly, will help do that for home and contents and strata. Even now up to 50% of some areas areas are without insurance or underinsured and we’re coming into yet another cyclone season. ” long time consumer advocate and NAIL Co-Chair Margaret Shaw said.

NAIL believes getting the design of the reinsurance pool right is imperative to addressing the issue of affordability & availability of insurance in Northern Australia. We will be contacting our local members of parliament in coming days to discuss our four major concerns in more detail.

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