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  • Northern Australia Insurance Premiums Taskforce

    FINAL REPORT

    November 2015

  • Page ii

    © Commonwealth of Australia 2015

    ISBN 978-1-925220-76-6

    This publication is available for your use under a Creative Commons Attribution 3.0 Australia licence, with the exception of the Commonwealth Coat of Arms, the Treasury logo, photographs, images, signatures and where otherwise stated. The full licence terms are available from http://creativecommons.org/licenses/by/3.0/au/legalcode.

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  • Page iii

    CONTENTS

    Acronyms and glossary ...................................................................................................... v

    Acknowledgements .......................................................................................................... vi

    Executive summary and recommended way forward ....................................................... vii Context and approach ............................................................................................................................ vii Threshold issues .................................................................................................................................... viii Feasibility of a cyclone mutual or reinsurance pool for cyclone risk ...................................................... ix Mitigation .............................................................................................................................................. xiii Other approaches ................................................................................................................................... xv Recommended way forward ................................................................................................................. xvi

    1. Context and approach ............................................................................................. 18 1.1 The context: managing the rise in insurance premiums in northern Australia ...........................18 1.2 Insurance premiums and market conditions in northern Australia .............................................20 1.3 The approach: assessing the feasibility of the options ................................................................22

    2. Threshold issues ..................................................................................................... 25 2.1 Regions of northern Australia experiencing affordability concerns due to cyclone risk .............25 2.2 Types of insurance to be covered ................................................................................................26 2.3 Defining a cyclone for the purpose of insurance .........................................................................27 2.4 Estimates of potential cyclone damage in northern Australia ....................................................28 2.5 Current cyclone premiums and cost to government ...................................................................36

    3. Insurance option 1: Mutual cyclone insurer ............................................................. 38 3.1 A possible design ..........................................................................................................................38 3.2 Criteria 1 and 2: the potential reduction in premiums and cost to Government ........................41 3.3 Criteria 3 and 4: effect on insurance and reinsurance markets and the potential for

    Government exit ..........................................................................................................................47

    4. Insurance option 2: Cyclone reinsurance pool .......................................................... 48 4.1 A possible design ..........................................................................................................................48 4.2 Criteria 1 and 2: the potential reduction in premiums and cost to Government ........................50 4.3 Criteria 3 and 4: effect on insurance and reinsurance markets and the potential for

    Government exit ..........................................................................................................................55

    5. Mitigation of cyclone damage ................................................................................. 57 5.1 Benefits and challenges of cyclone mitigation.............................................................................57 5.2 Reducing the vulnerability of buildings to cyclone damage ........................................................58 5.3 Options to reduce the vulnerability of houses in northern Australia ..........................................62

    6. Other approaches raised by stakeholders ................................................................ 74 6.1 Direct subsidy ...............................................................................................................................74 6.2 Reducing state insurance taxes and duties ..................................................................................76 6.3 Regulating commissions to strata managers ...............................................................................77

  • Northern Australia Insurance Premiums Taskforce final report

    Page iv

    6.4 Policy contestability and disclosure .............................................................................................79 6.5 Responses to insurance availability issues in the Indian Ocean Territories ................................80

    7. Comparison and summary of options ...................................................................... 82 7.1 Direct subsidy ...............................................................................................................................82 7.2 Insurance options .........................................................................................................................82 7.3 Mitigation .....................................................................................................................................86 7.4 Recommended way forward ........................................................................................................88

    Appendix A: Terms of reference ....................................................................................... 91

    Appendix B: Reference Panel members ............................................................................ 92

    Appendix C: Report by Finity Consulting ........................................................................... 93

    Appendix D: Alphabetical list of submissions .................................................................... 94

    References ....................................................................................................................... 95

  • Northern Australia Insurance Premiums Taskforce final report

    Page v

    ACRONYMS AND GLOSSARY

    ABS Australian Bureau of Statistics

    ACCC Australian Competition and Consumer Commission

    AGA Australian Government Actuary

    APRA Australian Prudential Regulation Authority

    ARPC Australian Reinsurance Pool Corporation

    ASIC Australian Securities and Investments Commission

    ATO Australian Taxation Office

    Catastrophe reinsurance

    Insurance purchased by insurers on the global market to protect them from large losses due to a catastrophe. Under the contract the insurer will meet the first portion of claims and claims above this level are covered by the reinsurer.

    CRC Co-operative Research Centre

    CTS Cyclone Testing Station, James Cook University

    Discretionary mutual fund

    Discretionary mutual funds offer an insurance-like product that often involves a contractual obligation to consider a claim, but provides the fund with discretion whether to pay the claim. They are not subject to the same level of prudential regulation by APRA as Australian authorised insurers.

    ICA Insurance Council of Australia

    NEXIS National Exposure Information System, Geoscience Australia