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A $10bn reinsurance pool, aimed at reducing expensive premiums in cyclone-prone north Queensland, will leave the government wide open for unexpected cost blowouts as climate change catastrophes increase, experts say.
Insurance premiums in northern Queensland have risen dramatically in recent years, as cyclones and floods become more frequent, forcing many people to abandon insurance entirely.
In Cairns on Tuesday, the prime minister, Scott Morrison, announced a cyclone reinsurance pool for northern Australia, backed by a $10bn government guarantee, which aims to protect more than 500,000 properties.
The government expects the pool will reduce premiums by more than $1.5bn over 10 years and it is set to launch in July 2022.
The government will guarantee insurers won’t lose money should they offer insurance products in that area. Essentially the commonwealth is insuring the insurance companies against any huge losses if they offer disaster cover.
The announcement comes after the Australian Competition and Consumer Commission recommended the government not use reinsurance pools last December, as they support the insurance industry rather than improve affordability.
While the exact design of the program has not been released, it is likely to be very similar to that of the terrorism reinsurance pool, established after 9/11 to cover the risk of local terrorist attacks.
But the frequency of natural disasters means the government is more exposed to these widespread payouts than it is for terrorist events.
The terrorism reinsurance pool is paid for by an Australia-wide levy on all existing insurance.
“This [new] fund is going to get hammered year after year as we get more cyclones,” said Allan Manning, the executive chairman of LMI Group, an insurance consulting business.
“We need to think about relocating people to safer regions that aren’t in the direct fire of a changing climate and building structurally sound buildings. That’s what will really mitigate this risk and bring insurance premiums down. At the moment, it’s just too great a risk for private enterprise.”
As it stands in north Queensland, the average premium for a strata property is reaching $6,800 a year, compared to the national average of $3,000.
In addition to the $10bn reinsurance pool, the government will also provide $40m to subsidise the cost of cyclone risk mitigation works for strata properties in north Queensland.
Nick Hawkins, the managing director and CEO of IAG, Australia’s largest general insurer, says the government’s proposed measures are just part of the long-term solution.
“We know we’re going to see more frequent and intense weather events, particularly in northern Australia,” he said. “These measures, along with greater investment in mitigation, improved land-use planning and the strengthening of building codes will help create stronger, more resilient communities.”
The Suncorp chief executive, Steve Johnston, agreed the measures must be accompanied by active mitigation.
“Disaster mitigation, rather than disaster clean-up, is where Australia should focus,” Johnston said, adding 97 cent from every dollar of disaster funding goes to recovery and rebuilding.
Last year, the federal government paid out more than $4.5bn in natural disaster assistance, following two cyclones, a flood and bushfires.
“This reinsurance fund has really only got enough in it for two cyclone seasons,” Manning said. “This leaves them wide open to unexpected natural disasters – events we are seeing more and more of.”
The ACCC’s Northern Australia Insurance Inquiry report recommended subsidies as a tool for bringing down premiums rather than a reinsurance pool.
“Subsidies have greater potential to work in a targeted way to relieve some of the acute affordability and cost of living pressures,” said the report.
“If governments want to intervene, they should consider doing so through direct subsidies based on both premium level and income eligibility requirements.”
The Insurance Council of Australia backed the ACCC’s findings at the time, but has today welcomed the government’s plans for the reinsurance pool.
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