Referral of the inquiry
1.1
The Treasury Laws Amendment (Cyclone and Flood Damage Reinsurance Pool) Bill 2022 (the bill) was introduced in the House of Representatives and read a first time on 9 February 2022.
1.2
On 10 February 2022, the Senate referred the provisions of the bill to the Senate Economics Legislation Committee (the committee) for inquiry and report by 24 March 2022.
Purpose of the bill
1.3
On 4 May 2021, against a background of several reviews and inquiries on the issue of access and affordability of insurance cover for natural disasters, the government announced its intention to establish a reinsurance pool covering the risk of property damage caused by cyclones and cyclone-related flood damage.
1.4
The bill fully implements the measure Cyclone and Related Flooding Reinsurance Pool — Implementation from the 2021-22 Mid-Year Economic and Fiscal Outlook (MYEFO).
1.5
Due to the greater risks of extreme weather events in cyclone-prone areas of Australia, insurance premiums are significantly more expensive. This has led to insurance cover becoming more costly and unaffordable for households and small businesses in affected regions of northern Australia. The key objective of the cyclone reinsurance scheme (the scheme), as explained in the Explanatory Memorandum (EM), is to lower insurance premiums for households and small businesses with high cyclone and related flood damage by reducing the cost of reinsurance.
1.6
The bill would allow insurers to reinsure cyclone risks at a lower cost than in the private reinsurance market, with the scheme designed to be cost-neutral to the government over time and backed by a Commonwealth guarantee. The bill also establishes a framework for the Australian Reinsurance Pool Corporation (ARPC) to implement the cyclone and related flood damage reinsurance pool.
1.7
The intent of the bill was explained by the Assistant Treasurer, the Hon Michael Sukkar MP, on 9 February 2022, stating that 'improved access to affordable insurance is vital to the economic prosperity and resilience of households and small businesses'.
1.8
According to the EM, amongst improving the accessibility and affordability of insurance in cyclone-prone areas, the proposed bill is expected to:
build the financial capability of affected households and small businesses to recover from natural disasters, and support the economic resilience and development of cyclone-prone areas in northern Australia;
increase competition by encouraging greater insurer participation in cyclone-prone areas; and
support higher levels of insurance coverage by property owners.
Background
1.9
The bill, as outlined in the EM and described above, is designed to improve insurance access and affordability for households and small businesses in cyclone-prone areas in northern Australia. The genesis of the cyclone reinsurance scheme lies in the findings of recent reviews and inquiries regarding the affordability and availability of insurance cover for natural disasters.
Relevant reviews and inquiries
Natural Disaster Insurance Review
1.10
On 4 March 2011, the then Assistant Treasurer, the Hon Bill Shorten MP, announced the Natural Disaster Insurance Review (NDIR). The then government asked the review panel to examine, and report on, the issues associated with availability and affordability of insurance offered by the private insurance market, with particular reference to floods, also noting that there were problems associated with cyclone risk insurance.
1.11
The NDIR concluded that irrespective of the reasons for extreme price increases for cyclone insurance, there were prima facie immediate affordability problems associated with cyclone risk insurance that would continue to cause problems.
1.12
Amongst the recommendations across four broad areas for a solution to the availability and affordability of insurance, the NDIR recommended the establishment of a reinsurance pool supported by a government guarantee.
Northern Australia Insurance Premiums Taskforce
1.13
The Northern Australia Insurance Premiums Taskforce (the Taskforce) was established in 2015 to consider the feasibility of options to lower insurance premiums and affordability concerns in areas of northern Australia subject to high cyclone risk. Specifically, the Taskforce was asked to assess two options —a mutual cyclone insurer and a cyclone reinsurance pool, as well as the consideration of other options put forward by stakeholders during consultations.
1.14
Whilst noting the assumption of risk through mitigation as a sustainable way to reduce premiums, in its final report published in March 2016, the Taskforce found that, of the two options the Taskforce was asked to assess, a reinsurance pool represented a more feasible option. In contrast to a mutual cyclone insurer, a reinsurance pool could deliver premium reductions of 10 to 15 per cent with the support of a government guarantee and promote competition through new entrants to the northern Australia insurance market. It also noted that as well as the assumption of significant risk, if the government did exit the market, any premium reductions would be reversed unless households had undertaken mitigation during this time.
1.15
On 18 December 2017, the then Turnbull Coalition government released its response to the final report of the Taskforce as well as the Senate Inquiry into the General Insurance Industry. Several policy measures were enacted in response, including the establishment of the Northern Queensland Strata Title Inspection Scheme, which commenced in 2019, as well as tasking the Australian Competition and Consumer Commission (ACCC) with undertaking an inquiry into insurance premiums in northern Australia.
Royal Commission into Natural Disaster Arrangements
1.16
The Royal Commission into Natural Disaster Arrangements (Royal Commission) was established in 2020 following the events of the 2019-20 bushfire season. The Royal Commission was charged with examining the coordination, preparedness for, response to and recovery from disasters, as well as improving resilience and adapting to changing climatic conditions and mitigating the impact of natural disasters.
1.17
In its report tabled in Parliament on 30 October 2020, the Royal Commission noted that maintaining an appropriate level of insurance is important for households and businesses to manage financial risks from natural hazards. It recognised that the cost of insurance is based on the price of risk, and that lowering the risk through mitigation actions by insurers can reduce insurance premiums whilst creating financial incentives for mitigation. The Royal Commission also recommended that state and territory governments consider previous inquiries’ recommendations to abolish taxes on insurance products.
ACCC Northern Australia Insurance Inquiry
1.18
On 28 December 2020, the ACCC reported on its three-year inquiry into the supply of residential building (home), contents and strata insurance in northern Australia. Commencing on 1 July 2017, the inquiry addressed concerns regarding insurance availability and promoting more informed and competitive insurance markets for consumers in northern Australia.
1.19
In its final report, the ACCC made 38 recommendations that seek to improve outcomes for consumers and the northern insurance market in the short, medium, and long term.
1.20
Whilst noting risk with subsidies, such as distorting price signals for consumers and price absorption by consumers over time, the ACCC recommended consideration of direct subsidies as a preference over other measures such as a government reinsurance pool, to provide immediate relief to consumers facing acute affordability pressures.
1.21
Other recommendations by the ACCC include the abolishment of stamp duty on home, contents and strata insurance and risk mitigation strategies to reduce the risk of property loss or damage.
1.22
The inquiry also found that addressing acute affordability issues would help to reduce levels of non-insurance in northern Australia, which may in turn, lower future costs to governments of providing relief to affected communities following disasters.
Budget 2021-2022
1.23
On 4 May 2021, the Treasurer, the Hon Josh Frydenberg MP, announced its intention to establish a reinsurance pool for cyclones and related flood damage, to commence from 1 July 2022 and be backed by a $10 billion Government guarantee. In its announcement, building on the 2021-22 Budget measure titled Cyclone and Related Flooding Reinsurance Pool, the government outlined that the pool will covers residential, strata and small business property insurance policies in Northern Australia and 'will improve the accessibility and affordability of insurance for households and small businesses in cyclone-prone areas'.
1.24
The 2021-22 MYEFO paper notes:
In addition [to the $10 billion Government guarantee], the Government will provide $18.6 million over four years from 2021-22 to support the implementation and oversight of the Pool and to monitor premiums and savings that are passed on to policy holders. Funding includes:
$15.4 million over four years from 2021-22 for the Australian Competition and Consumer Commission to prepare and conduct a price monitoring role in relation to the insurance industry, with a focus on evaluating the impact of the cyclone reinsurance pool and whether the savings from the reinsurance pool are being passed through to policyholders
$3.2 million over four years from 2021-22 for the Treasury to establish, oversee and evaluate the Pool. This measure builds on the 2021-22 Budget measure titled Cyclone and Related Flooding Reinsurance Pool.
Provisions of the bill
Overview of the amendments
1.25
The bill has one schedule and amends the Terrorism Insurance Act 2003 (the Act) to extend its operation of the terrorism reinsurance scheme to also include the cyclone reinsurance scheme.
1.26
The bill also amends the Insurance Act 1973 to include a civil penalty for insurers whose participation in the scheme is mandatory, and do not reinsure all eligible cyclone risks with the ARPC. The Commonwealth Government, as noted in the EM, is bound by the scheme as set out in the Act, however this does not make the Commonwealth Government liable to any pecuniary penalty.
1.27
The bill implements a framework for the reinsurance scheme which is designed to lower insurance premiums for households and small businesses with high-cyclone and related flood damage risk by reducing the cost of reinsurance.
1.28
A number of provisions are contained in the bill to set up the framework which encompasses:
eligible cyclone related losses;
eligible cyclone insurance contracts;
funding arrangements; and
1.29
The bill establishes a cyclone reinsurance scheme whereby insurers providing insurance that covers eligible cyclone risk in Australia are required to obtain (subject to a minimum premium test) reinsurance for such risks with the ARPC. As stated in the EM, for the scheme to achieve the maximum reductions in insurance premiums in cyclone-prone areas, insurers holding eligible cyclone risks must participate.
1.30
The bill provides for the scheme to be backed by an annually reinstated $10 billion Commonwealth guarantee (supported by a special appropriation). The EM specifies that a decision to draw upon the guarantee must be made if funds from the reinsurance pool are insufficient to meet claim costs. A mechanism for the Minister to increase the cap on the guarantee amount is also provided for within the bill.
1.31
Amendments to the Act give the ARPC a new function of operating the scheme. The regulation-making power that provides that the ARPC may perform any other functions is retained. The bill also expands the number of other part-time members of its board to two, ensuring that the APRC has the capacity to take on its new responsibility of administering the scheme.
Consultation
1.32
The Department of the Treasury (Treasury) sought feedback from stakeholders on the proposed reforms through a detailed public consultation process on the associated exposure draft legislation and explanatory material to inform the reinsurance pool's final design. This consultation process was conducted from 21 May 2021 to 18 June 2021 and received 64 submissions from a broad range of industry and community stakeholders.
1.33
As outlined in Treasury’s consultation paper, the key purpose of the stakeholder consultation was to gauge the potential impact of a reinsurance pool and to better understand the state of the current market, problems facing the market, options for reform and their feasibility, as well as examining approaches to implement these options.
1.34
The submissions and discussions during the associated Taskforce in June 2021 reaffirmed the challenges of insurance affordability and access in northern Australia. Feedback through the consultation process also demonstrated the impact of insurance affordability and provided greater insight into potential complications associated with aspects of the proposed reinsurance pool design that were, in turn, addressed and incorporated into the policy development of the reinsurance pool during the design process.
Commencement
1.35
The bill commences the day after Royal Assent. The cyclone reinsurance scheme will come into effect on 1 July 2022 at which time insurers are expected to start joining the scheme. However, insurers may enter into contracts with the ARPC prior to this date and after commencement of the bill.
1.36
Under the proposed scheme, large insurers will have until 31 December 2023 to join the scheme, at which point they must have obtained reinsurance for all their eligible cyclone risks with the ARPC. Small insurers must reinsure all their eligible cyclone risks with the ARPC by 31 December 2024.
Financial impact
1.37
The EM states that the guarantee supporting the reinsurance pool is an unquantifiable contingent liability and no impact on the fiscal or underlying cash balance is anticipated unless the guarantee is called on.
Legislative scrutiny
1.38
In its Scrutiny Digest 2 of 2022, the Senate Standing Committee on the Scrutiny of Bills (the Scrutiny Committee) did not raise any concerns with the bill.
Human Rights implications
Statement of compatibility with Human Rights
1.39
As discussed in the EM, the Statement of Compatibility with Human Rights states that the bill is compatible with the human rights and freedoms recognised in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011, and thus does not raise any human rights issues.
The right to an adequate standard of living
1.40
The EM articulates that the bill may engage the right to an adequate standard of living in Article 11(1) of the International Covenant on Economic, Social and Cultural Rights (ICESCR) which provides that all individuals are entitled to an adequate standard of living, including adequate housing and to a continuous improvement of living conditions.
1.41
The cyclone reinsurance scheme may promote and engage this right as it is designed to improve insurance access and affordability in cyclone-prone areas in Australia by 'providing households with a pathway to repair any cyclone and flood-related damage and ensure adequate housing through improving access to, and affordability of, insurance'.
Regulatory Impact
1.42
The EM to the bill provided a comprehensive Regulation Impact Statement (RIS). The RIS addresses the underlying problems in relation to insurance affordability and accessibility in northern Australia, current government measurers to address affordability, options that have been considered previously, and provides a detailed discussion of current policy options to mitigate the issue at hand.
Conduct of the Inquiry
1.43
The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting submissions by 4 March 2022.
1.44
The committee received 22 submissions as well as additional information and answers to questions on notice, which are listed at Appendix 1.
1.45
The committee held one public hearing for the inquiry on 8 March 2022. The names of the witnesses who appeared at the hearing can be found at Appendix 2.
Acknowledgements
1.46
The committee thanks all individuals and organisations who assisted with the inquiry, especially those who made written submissions and participated in the public hearing.