Purpose
This bill aims to lower insurance premiums for households and small businesses in cyclone prone areas. Insurers will be able to reinsure in a cost-neutral scheme which has a government guarantee.
This bill aims to fulfil the government’s commitment to enable households and small businesses in cyclone-prone areas to access and afford insurance. At the same time, the scheme must be contained to avoid costs to taxpayers
The bill must be directed at this stated objective. This scheme has the potential to extend beyond this. It is therefore commendable that the bill includes guardrails to prevent overextension. These checks should be maintained, and where necessary, strengthened.
The Problem
According to the Insurance Council of Australia (ICA), the average claims cost in northern Queensland is around $7,300, compared to a national average of $6,500. The Australian Competition and Consumer Commission (ACCC) cited the rate of non-insurance in northern Australia as 20%, compared to a national average of 11%. 95% of surveyed non-insured persons in northern Australia attributed this to cost. The cost of insurance is a burden for small and medium businesses.
The ACCC found in the final report of the Northern Australian Insurance Inquiry:
… over the 12-year period to 2018-12, insurers in northern Australia have experienced an estimated aggregate gross loss, across home, contents and strata insurance products of approximately $856 million.
Issues
I am concerned about the risk that the reinsurance scheme will extend beyond its intended areas of operation. The bill has a number of provisions which are aimed at preventing this from occurring. The risk of overextension will require constant vigilance.
The eligibility requirements in the bill are commendable limitations on the operation of the scheme. The scheme will apply in respect of claims arising from eligible cyclone events, as declared by the Bureau of Meteorology (BoM), to a maximum of 48 hours after the cyclone formally ends. While several stakeholders, including the ICA and the North Queensland Regional Organisation of Councils (NQROC), expressed a view that the 48-hour time limit was too limited, I believe that this is a prudent and sensible limitation.
As was pointed out by the Northern Australia Insurance Lobby (NAIL), it is the insurer, not the client, who is able to make the claim against the reinsurance pool. The 48-hour time limitation covers the tail risks of a major event, while ensuring that the primary responsibility rests with the insurer.
Further, the bill is limited in application to contracts for household property, strata property, small business property, or charities and not-for-profit property. Non-household property will be subject to the maximum sum insured test. As with the temporal limitations, there were calls to extend the application of this scheme. I note that the Government made a commitment specifically to improve access to insurance for households and businesses. The scheme should not, in any circumstances, be extended beyond that.
Extent of the Scheme
Extreme weather events will increase in duration and intensity in the foreseeable future. Investing in adaptation and mitigation must be a priority. In submissions, stakeholders called for an extension of this scheme beyond the intended scope.
The ICA called for an extension of the time period from 48 hours to 168 hours (seven days). The Property Council of Australia submitted that larger businesses should not be excluded from liability. In verbal evidence to the Committee, Dr Antonia Settle called for a blanket subsidy to the insurance market. I commend the Committee for rejecting these extensions.
Overseas experience is instructive. The Explanatory Memorandum (EM) notes that 'Government insurers in the past have proved to be problematic and costly'. In the United States, the National Flood Insurance Program was covered entirely by premiums until 2004. It has since had to borrow US$39 billion from the Government. Both the New Zealand (NZ) Earthquake Commission and the California Earthquake Authority have required additional funding from levies.
The presence of a $10 billion government guarantee implies that taxpayers may be exposed to risk. The Minister is empowered to increase the guarantee amount. I would caution against the expansion of this guarantee beyond what is absolutely necessary. Accordingly, the bill should not provide for an increase in the threshold beyond $10 billion. To that effect, I recommend that Schedule 1, s35A be amended to remove sections (2)(b)(3)(4)(5) and (6) of the bill.
Mitigation
Severe weather events will become more frequent and more intense. As the Prime Minister has said, 'Australia is becoming a harder country to live in because of these natural disasters'. As a consequence, insurance losses are likely to increase significantly in the coming decades. This is not only a result of climate change, but also likely as our population continues to increase, and population centres continue to expand in geographic scope.
As the Senator for New South Wales, I have witnessed this firsthand in recent weeks. The unprecedented rainfall and flooding Sydney experienced in February saw significant property damage.
In 2017, Deloitte established the total cost of natural disasters in Australia to be $18 billion, which was projected to rise to $38 billion by 2050.
As the ICA submitted, this scheme can only be one part of the solution. A suite of reforms have been consistently recommended to improve Australia's resilience for natural disasters. This includes changes to land use planning, building codes, the removal of state taxes and chargers, and spending on mitigation infrastructure. The ICA submits that while 97% of disaster funding is spent on clean up and recovery, only 3% is spent on prevention.
While the reinsurance scheme will help to reduce the costs of natural disasters for those in cyclone prone areas, the focus must be on resilience. At present, it is not. If the taxpayer is going to be financially exposed to the reinsurance costs of natural disasters, the government must ensure that those costs are minimised through mitigation and adaptation.
Review period
I note that the bill provides for a formal review three years after the commencement of this scheme, and then, once aligned with the terrorism reinsurance scheme’s review, every five years thereafter.
For the reasons I have outlined, this scheme poses risks which require vigilant oversight. I therefore commend the government for its commitment to undertake a review of the reinsurance pool just 12 months after the bill's implementation to ensure that the scheme's targeted focus is maintained, and any appropriate amendments can be made in a timely manner.