Throughout this inquiry the committee has heard evidence about the affordability and availability of insurance in Northern Australia. Over the last decade, a range of inquiries have looked into these issues.
This chapter provides an overview of the insurance related findings of the Our North, Our Future: White Paper on Developing Northern Australia (the White Paper) and recommendations arising from the Northern Australia Insurance Premiums Taskforce (the Taskforce) which was established as a result of the White Paper. The recent inquiries undertaken by the Australian Competition and Consumer Commission (ACCC) in relation to insurance in Northern Australia are also examined, along with the evidence received by the committee on these issues.
While there have been many reviews into this area, evidence provided to the committee clearly indicates that the insurance situation in Northern Australia is worsening and that it is becoming no longer tenable for individuals, businesses and even local councils to remain insured. This is an unacceptable situation and one that requires immediate action from the Federal Government, especially in the area of mitigation (discussed below).
Our North, Our Future: White Paper on Developing Northern Australia
The White Paper found that businesses had identified 'the high cost of insurance' as a barrier to investment, with smaller businesses potentially disproportionately impacted. Yet the White Paper noted that it is these businesses – tourism, agriculture, transport and services – that need to grow if the north is to have a more diversified economy. Accordingly 'the cost of doing business must be reduced as investors seek to minimise the time, risk and costs associated with establishing new operations'.
The White Paper also found that insuring a house or business in the north can be expensive with costs in 'north Queensland five times higher than Sydney and Melbourne for strata insurance and two-and-a-half times higher for home insurance'. The prevalence of extreme weather events and a lack of competition and contestability in Northern Australia's insurance market, compared with the south, were identified as contributing factors to this high cost.
The Northern Australia Insurance Premiums Taskforce
The White Paper recommended the establishment of the Taskforce 'to explore the feasibility of options to reduce the high cost of insurance premiums due to the risk of cyclones in Northern Australia, including options that used the Commonwealth balance sheet'.
To this end, the Taskforce was responsible for exploring the feasibility of options to address insurance affordability concerns arising from cyclone risk. Specifically it was to assess the feasibility of two options — a mutual cyclone insurer and a cyclone reinsurance pool.
The Northern Australia Insurance Premiums Taskforce Final Report (the Taskforce Final Report) was delivered to the Australian Government in November 2015. The Taskforce Final Report made the following six recommendations:
A sustainable way of reducing premiums over the long run is through mitigation. The reduction in premiums that could be achieved from mitigation will depend on individual circumstances and the mitigation action taken. However, such reductions can only be achieved by household action.
Governments can take a range of relatively low-cost (compared to other options) measures to promote mitigation. Additional funding could be provided for research to improve mitigation options particularly for roof strengthening and water ingress. In addition, there is the potential for additional education campaigns to encourage and support property owners to undertake mitigation and for public works spending to reduce the risk of some forms of cyclone damage, such as flooding.
The insurance industry should develop insurance pricing systems that provide greater recognition of mitigation action and be more proactive in offering a range of policy options that provide increased scope for policyholders to assume more responsibility for risk of cyclone damage in return for lower premiums. For example, policies could exclude cover for certain outdoor items or offer higher cyclone excesses.
The insurance industry should engage more effectively with property owners in Northern Australia. This requires improved disclosure of risks and greater responsiveness to policyholder concerns. The industry has already taken steps in this direction. Governments could support these moves by, for example, organising information sessions to bring together insurers and property owners. Potentially, there is also a role for legislating enhanced requirements around the disclosure of risks if industry efforts do not yield meaningful results for consumers.
Some property owners may not be able to realise premium reductions from mitigation because they do not have the financial capacity to undertake the necessary work. One option to address this situation is governments directly subsidising the cost of mitigation for low income households. The mitigation action subsidised should be tailored to individual circumstances and could cover such options as protection of windows and doors. The cost of more extensive subsidised mitigation could be substantial. For example, a retrofit scheme for strengthening roofs for older properties in northern Queensland is estimated to cost around $1 billion (or $500 million if targeted at low-income household). Any mitigation subsidy scheme should be developed in consultation with the state and territory governments, who (supported by local councils) are best suited to deliver such a program. Any scheme would need to be phased in having regard to the ability of industry to meet increased demand. A subsidy scheme would also benefit from the outcome of further research into identifying cost effective and acceptable mitigation measures.
Of the two insurance options the Taskforce was asked to assess, a reinsurance pool represents a more feasible approach than a mutual. In contrast to the mutual, the reinsurance pool could promote competition through new entrants to the Northern Australia market. A reinsurance pool which charged premiums to cover the estimated long-run cost of claims from cyclones and was supported by a Government guarantee might offer a premium reduction for consumers of 10-15 per cent. It would be difficult, however, to ensure that cost reductions for insurers did in fact flow through to premium reductions for customers. The Government would assume significant risk in order to achieve any reduction in premiums. The cost to the Government would depend on the number and severity of cyclones during the life of the scheme and whether they hit major population centres. It is estimated that the Government would face a 50-60 per cent chance of having to make a payment under the guarantee if the scheme ran for 10 years and a 10-20 per cent chance these payments would exceed $2 billion in total. While there is greater potential compared with a mutual for the Government to withdraw support for a reinsurance pool, overseas experience demonstrates that it is very difficult for governments to exit from any intervention in insurance arrangements. If the Government did exit the market, any premium reductions would be reversed unless households had undertaken mitigation during this time.
The Australian Government provided its response to the Taskforce's Final Report on 18 December 2017. The Government response noted that 'the Taskforce found that mitigation activities to reduce the risk of damage from cyclones are the only way to reduce premiums on a sustainable basis. The Government accepts this finding, and will not intervene directly in the insurance market'.
Instead, the Government noted that it was proceeding with reforms to place downward pressure on insurance premiums through increased accountability and transparency within the industry, as well as proposals to increase consumer understanding of insurance. These reforms include:
Ensuring consumers are treated fairly through the General Insurance Code of Practice. The code sets out the standards that general insurers must meet when providing services to customers and timeframes for insurers to respond to claims, complaints and requests for information from customers. The Government calls on the Insurance Council of Australia (ICA) to expedite work on reforming the Code.
Extending the unfair contract term provisions to contracts of insurance with proposals to be released in early 2018.
Tasking the Australian Securities and Investments Commission (ASIC) with developing options to improve consumer understanding of insurance products as part of the development of a financial literacy strategy, and to work with industry on its ability to provide guidance to consumers on their insurance needs.
Tasking the Commonwealth Treasury with developing proposals to improve consumers' understanding and access to information through better transparency and enhanced disclosure practices in the insurance sector.
ACCC: Northern Australia insurance inquiries
In July 2017, following a direction from the Australian Government, the ACCC commenced an inquiry into the supply of home, contents and strata insurance in Northern Australia. The inquiry released update reports in December 2018, December 2019 and December 2020.
Northern Australia Insurance Inquiry, First Interim Report
In December 2018, the ACCC released its Northern Australia Insurance Inquiry, First Interim Report (First Interim Report). The First Interim Report made 15 recommendations 'designed to improve how insurance markets work and achieve better outcomes for consumers'. The ACCC urged governments and industry to take quick action on its 15 recommendations and noted that 'some have been made a number of times before'.
In addition to the 15 recommendations made in the First Interim Report, the ACCC made a further 13 draft recommendations that it 'considered had the potential to make markets work more efficiently by improving information and choices available to consumers and addressing conflicts of interest'. In publishing the First Interim Report, the ACCC invited public comment on the 13 draft recommendations.
After considering stakeholder views, the ACCC finalised the 13 draft recommendations (six without amendment, seven with minor amendments) in its 2019 Northern Australia Insurance Inquiry, Second Update Report (Second Update Report). The ACCC again 'urged governments and industry to act quickly on all 28 recommendations'. In the Second Update Report, the ACCC noted that 'the Australian Government is still considering its response to the first 15 recommendations' contained in the First Interim Report.
The 2020 Northern Australia Insurance Inquiry, Final Report (ACCC Final Report) brings together the ACCC's analysis and recommendations made throughout the three year inquiry. The ACCC Final Report notes:
home and contents insurance premiums are considerably higher, and have risen faster, in Northern Australia;
insurers are using more granular data and sophisticated pricing techniques, which is exacerbating affordability problems for some consumers;
higher and more volatile claims costs have led to poor profitability in Northern Australia;
unusual market dynamics are leading to soft competition;
high premiums are leading to a rise in the number of uninsured homes but there is little help available for customers experiencing payment difficulties;
while shopping around can help consumers find lower premiums, understanding and comparing policies is harder than it should be; and
reforms to land use planning and building standards can help reduce risks and costs in the longer term.
The ACCC Final Report made 38 recommendations, including 11 new recommendations beyond those in its two interim reports, across the following six categories:
Making it easier to search for, and compare, insurance products;
Choosing the right amount of cover;
Dealing with conflicts of interest;
Addressing immediate affordability concerns;
Improving consumer rights; and
Reducing risk and building better.
The committee received a range of evidence in relation to the affordability of insurance in Northern Australia.
Mr Karl Sullivan, Head of Risk and Operations, Insurance Council of Australia, told the committee about the rising cost of insurance in Northern Australia over the last decade. Ms Sullivan told the committee:
Over the last decade they have been going up very considerably, particularly for strata insurance but also for home contents and commercial cover. For those in cyclone exposed regions, they have gone up particularly sharply. If you're on an older property or if you're in a cyclone region that is also exposed to flooding at that particular address, then the increases in premium can be even higher.
Similarly, Mr Ry Collins, Project Coordinator, Economic Development, Whitsunday Regional Council, noted that the increasing cost of insurance in Northern Australia has been 'identified as an unsustainable trend and a cost that business[es] have to consider, going forward, whether they can afford it in their normal operation'. Mr Collins stated:
Not speaking specifically to mining but generally to insurance access in the region, it is an issue of business concern. It's probably not specifically around access but around the cost of insurance generally and the increases that have been implemented, through insurance premiums, in the last decade.
Ms Mary Carroll, Chief Executive Officer, Capricorn Enterprise, also observed that 'businesses are reporting that insurances are going up [and] that the cost of doing business is going up'.
Ms Kylie Porter, Chief Executive Officer, Greater Whitsunday Alliance and Regional Development Australia Mackay-Isaac-Whitsunday Inc, commented on the 'issue of insurance affordability, or unaffordability' for households and businesses. Ms Porter told the committee that:
It's a hugely problematic issue for our region. We have respondents who are reporting increases of anything between 50 and 500 per cent in insurance premiums across the region. That's not just for residential; that's also for business.
Mr Mark Day, Executive Director and Chief Executive Officer, Mackay Sugar Limited, noted that the organisation was 'looking at significant premiums'. Mr Day stated:
I think that we're probably facing [a] 50 per cent increases in premium—of that order—plus the excess for particular things has gone up three- or four-times fold.
A number of submitters reflected on the impact that the increasing cost of insurance in Northern Australia was having on households, businesses and development in Northern Australia.
Ms Margaret Shaw told the committee that excessive increases in insurance premiums over the years have had a:
devastating effect on areas already affected by the downturn in the resources sector, COVID and the subsequent drop in tourism, and they cause mental and physical ill-health and financial difficulties. They have led to mortgage stress and a major reduction in property values and bankruptcy.
Mr Matthew Tickner, Vice President, Cairns Chamber of Commerce told the committee that due to the rising cost of insurance:
We have homeowners and business owners forgoing insurance—that is a fact—up in Cairns. We have a lot of members who, if they are not able to forgo certain insurances on their business, are actually forgoing insurance on their family home to make up for it because premiums are so high.
Ms Patricia O'Callaghan, Chief Executive Officer, Townsville Enterprise Limited, noted the impact that the cost of insurance has had on businesses and residents in the region and those considering investing or living in the region. Ms O'Callaghan stated:
The other cost that's impacting businesses as well as residents is insurance. On the back of the floods earlier this year, we have grave fears about what's going to happen to insurance premiums but also whether some insurance companies will completely walk away from the north. When you're looking to attract people to live here, but also if you're trying to attract a business investment, those costs alone are very significant.
Affordability only worsened in the wake of the COVID-19 pandemic. Mr Gareth Phillips, Chief Executive Officer, Association of Marine Park Tourism Operators, noted how the tourism industry was now facing a reduction in assistance as JobKeeper winds up and banks begin to seek delayed repayments:
As we move past this December period and the school holidays, the future is unknown for the marine tourism operators. As assistance drops back, as insurance starts to come in and as banks start asking for the repayments to kick in, we don't know what's going to happen to the industry. The next three months, six months, one year, three years, five years are very unclear at the moment, and we are going to be looking at a very different landscape.
At the same hearing, Ms Melinda Eades, Executive Officer, Torres Cape Indigenous Council Alliance, made the point that affording insurance was even becoming out of reach for local councils:
… from a local government perspective, I know that their insurance costs have absolutely skyrocketed. They have been working with the Local Government Association of Queensland around the potential of a local government insurance mutual to try and drive some of those costs down. Some councils have been forced to make decisions around self-insuring because they can't afford insurance. Some councils saw a 200 or 300 per cent increase in insurance costs. It's a very significant issue for local governments in particular.
Similarly, Ms Hollie Faithfull, Acting Chief Executive Officer, Torres Strait Island Regional Council, described to the committee the struggles in the council managing to insure its assets:
An example of that is what we faced for 1 July 2020. It came down to the eleventh hour to seeing if someone would actually insure our $1.6 billion worth of assets; we received confirmation on 29 June. We had to make a decision for council to be sustainable. Three years ago our excess used to be $5,000. It increased last year; in 2019 we had to make the decision to increase it to half a million dollars. This financial year we had to make the decision, to afford the insurance, to make it $1 million. So our excess is astronomical. With that $1 million excess, our premium is $4.2 million. Over the last three to four years it's gone from about $2.7 million to $4.3 million. We had a $5,000 excess that we were able to claim for pretty much nearly everything; now an event has to be a significant major event before we can claim against it. So our council has seen the effect of rising insurance, and it becomes a sustainability issue for council.
The committee received a range of evidence regarding the availability of insurance in Northern Australia and the impact this was having on households, businesses and investment in Northern Australia.
While noting that 'insurance is something that is essential to have', Ms Delia Rickard, Deputy Chair, ACCC, told the committee that 'unusual market dynamics [are] leading to soft competition and quite concentrated markets' in Northern Australia. Ms Rickard noted that:
It often appears that insurers are not trying to win market share in the higher risk areas. The higher premiums are leading to a rise in the number of uninsured homes there. We rated that in 2016—we do not have more up-to-date data—and it was around about 20 per cent as opposed to 11 per cent for the rest of Australia. The trend lines we were seeing there were continuing to go upwards.
Ms Kylie Porter, Chief Executive Officer, Greater Whitsunday Alliance and Regional Development Australia Mackay-Isaac-Whitsunday, observed that the 'the rest of Australia [may not] realise the predicament that Northern Australia finds itself in' with regards to accessing insurance. Ms Porter noted that:
We're hearing many, many examples whereby people are self-insuring because they quite simply can't access coverage for our region. This applies for things like body corporate organisations and tourism providers. Basically, if we have another major event in our region … we will actually have a situation where we are uninsurable.
Similarly, Ms Glenys Schunter, Chief Executive Officer, Regional Development Australia, Townsville and North West Queensland, expressed concerns around access to insurance and the impact this could have on attracting investment. Ms Schunter observed:
But I stress the importance of the issue of the north, in terms of insurance—not only affordability but also access to insurance. Our increasing concern after the recent flood events is that even insurability will become an issue. Not only for residents but, importantly, for small- and medium-size businesses that is a major challenge for us to attract investment.
Ms Mary Carroll, Chief Executive Officer, Capricorn Enterprise, echoed these views. She told the committee:
Absolutely, positively, definitely the short answer is yes. Insurance is a major inhibitor for businesses across many industries.
Mr Benjamin Kingsberry, Townsville Zone Chair, Real Estate Institute of Queensland, offered a number of examples to illustrate the increasing number of buildings that are being insured offshore or underinsured in Northern Australia. Mr Kingberry stated:
One of them is covered for $5 million and it has a replacement value of $9 million; so, if that building has a significant event, it is hugely underinsured. Another one is covered at $5 million and has a replacement value of $8 million. With the last, there is coverage of $10 million on a $35-million building, and it is costing them $400,000 offshore to have $10 million worth of cover. So they are at four per cent of the building sum insured, with a shortfall of $25 million and a $250,000 cyclone excess if there is any sort of event. So, before they can claim a dollar, they have spent $650,000 to be able to claim a maximum of $10 million.
Mr Kingsberry also highlighted how a lack of access to insurance is affecting investment in development in Northern Australia. Mr Kingsberry told the committee:
What developer[s] in their right mind are going to go and build 100 units, not knowing if they can get insurance on it and, if they can get it, not knowing what level it will be at upon completion; and, if they cannot get it, what if none of those contracts can settle and what if all of those pre-sales cannot settle because there is not sufficient insurance on the property?
Similarly, Mrs Margaret Shaw, observed that 'I do not understand how you can begin to expand Northern Australia without insurance coverage'. Furthermore, she noted that:
without insurance, affordable insurance, you cannot encourage older people to move into apartments, leaving their homes for families to take up. You increase rents, putting strain on lower income people. You deter investors from investing. You stop developers. You stop people moving north. You prevent expansion. Without insurance, affordable insurance, you cannot open up Northern Australia and it cannot flourish and grow.
Industry specific impacts
The committee received a range of evidence regarding the impact that the availability and affordability of insurance in Northern Australia is having on specific industries, including the Mining, Equipment and Technology (METs) sector, real estate, aged care and the refrigerated warehouse and transport industry.
The Mining, equipment and technology sector
Mrs Adrienne Rourke, General Manager, Resource Industry Network, told the committee that a number of insurers had moved away from the METs sector. Mrs Rourke stated 'there are one or two major reinsurers who have now moved away from any business that has associated with mining generally—not necessarily a mining house but a business that may be generating income or turnover from mining. There are others that have made a policy of, 'If you're generating more than 30 per cent of your turnover from mining, we're not going to insure you'.
Mrs Rourke noted that while 'everyone is able to get insurance from somewhere' she was concerned that 'the market is narrowing' and that there are concerns that 'we'll see an increase in premiums of up to 40 per cent because there are fewer reinsurers offering the service to METs businesses'.
Mr Karl Sullivan, Head of Risk and Operations, ICA, acknowledged that the 'strata issue is a longstanding issue where prices have increased, particularly in the north and particularly for older buildings and buildings that are within a certain distance of the coast or in a flood exposed area'. Mr Sullivan told the committee that the 'issue is getting worse, not better.'
Mr Kingsberry, from the Real Estate Institute of Queensland, also outlined the challenge of finding insurance in the real estate industry. Mr Kingsberry stated:
The reality for many people in this industry now is that it is not what is the best policy; it is can I get one, and that's it. If you can get one, whatever number that invoice says, you pay it, and that's it. There is just no competition whatsoever. Predominantly, I would argue that we have a number of markets in Townsville, such as the residential market; the smaller strata stuff is obviously very challenging in Northern Australia in general. Once you get into that market of $5 million—plus for building sum insured, you have got complete market failure.
Mr Kingsberry provided the committee with further insights into how the body corporate market is operating, particularly for larger buildings, in response to the insurance situation. He stated:
… if you do have a domestic policy, you're desperate to keep it; you're absolutely desperate. If you got offered a policy by SUU this year, you're desperate to have it next year. When you have a $25,000 or $30,000 event happening, committees are now making the decision to go and pay for those repairs: 'Let's not make a claim; let's not put it through the insurance policy; let's not use the insurance policy for what it's designed for, because we're terrified about next year.
Mr Kingsberry further explained the likely longer term effects that insurance related issues may have on the industry. He told the committee that:
We're seeing the amount of body corporate fees where the insurance budget is 70 per cent or 80 per cent of the money collected and they're actually degrading their sinking fund, they're degrading their future maintenance plan and they're degrading the works that they were thinking about doing this year, because they just don't have the money and they're trying to keep those premiums at a somewhat affordable level. There's this longer term cost and, in five or 10 years time, we're going to be in that cycle where they haven't replaced their roof because they've been spending the money on insurance, and then the insurance company tells them to go away because their roof is not good enough. We're going to see that cycle perpetuate forever.
The committee heard a recent example about the impact of insurance on a Townsville aged care provider, Good Shepherd Home which has been operating in Townsville for 49 years. During this time Good Shepherd Home has had one major insurance claim following the floods of 2019. Mr Ross McLennan, Chief Executive Officer, Townsville Chamber of Commerce, told the committee about the cost of insurance for Good Shepherd Home:
The industry average cost of a resident per day in a retirement village is $1.17 for insurance. The Good Shepherd nursing home is paying $9.86 per person, per day … they are running at a loss of $4 per day, per person, in that centre … Their insurance costs in 2017-18 were $44,656; in 2018-19, they were $52,174; and, in 2019-20, after the floods, they were $569,752, or an increase of 992 per cent. This year, they were unable to get that insurance and had to take it on a monthly basis; when they got it, it was $666,895, representing a 1,393 per cent increase since the 2017-18 financial year, and the home is now running at a loss.
Refrigerated warehouse and transport industry
Mr Karl Sullivan, Head of Risk and Operations, ICA, told the committee that insurance availability for the refrigerated warehouse and transport industry was very limited, commenting that he was 'actually surprised that you've heard people can get insurance for those at all'. Mr Sullivan told the committee:
The essential problem, particularly in the older ones, is they are constructed from highly vulnerable materials. The largest engineering based insurers in the world, who also operate here, have moved in the last five years to stop insuring that material; it's simply too dangerous for them to underwrite.
Similarly, Treasury informed the committee it was:
… aware that the availability and affordability of insurance for the refrigerated warehouse and refrigerated transport industry has deteriorated. This is because cold storage facilities have traditionally been constructed with highly flammable materials and constructed in a way that creates a high risk of total loss. Large insurance claims from fires at abattoirs and meat factories in recent years and the usage of expanded polystyrene (EPS) products in the construction of refrigerated warehouse facilities have been attributed as contributing to the rising cost of insurance.
To illustrate this evidence, Table 8.1 provides examples of insurance costs for companies in the refrigerated warehouse and transport industry between 2018 and 2020.
Table 9.1: Examples of insurance costs in the refrigerated warehouse and transport industry 2018 – 2020
$1.5m - $2.5 m (+67%)
$2.9 m - $4.2 m (+43%)
Expecting a 10% increase
$170,500 - $188,189 (+11%)
$188,189 - $317,734 (+69%)
$317,734 - $344,257 (+8%)
$70,501 - $78,479 (+11%)
$78,479 - $80,253 (+3%)
$80,253- $104,988 (+31%)
$159,413 - $209,536 (+31%)
$209,536 - $412,961 (+97%)
Estimated $412,961 - $504,460 (+22%)
An increase of 120% over the last 4 years
$643,560 - $787,130 (+22%)
$787,130 - $918,350 (+17%)
$918,350 - $1,300,000
$69,355 - $75,840 (+9.5%)
$75,840 - $97,859 (+29%)
$97,859 - $109,700 (+12%)
$359,038 - $350,089 (-2%)
$350,089 - $457,455 (+31%)
$457,455 - $744,974 (+63%)
$184,840 - $274,627 (+48%)
$274,627 - $291,150 (+6%)
$87,000 - $104,985 (+20%)
$104,985 - $109,964 (+5%)
75% over 4 years
$77,260 - $145,185 (+87%)
$145,185 - $151,798 (+4.5%)
$151,798- $204,484 (+34%)
Source: Treasury, Answers to written questions on notice, received 8 May 2020.
Suggestions to improve insurance affordability
A number of submitters made suggestions as to how insurance issues could be addressed. These included the establishment of an insurance disaster pool or reinsurance pool, expanding the remit of the Northern Australian Infrastructure Facility (NAIF) to include mitigation infrastructure and schemes such as the Queensland Government's Household Resilience Program.
The committee heard a range of evidence in relation to the establishment of a reinsurance pool for insurance in Northern Australia. A reinsurance pool is a risk financing mechanism used by insurance companies to increase their ability to underwrite specific types of risks. As part of this mechanism, the insurer cedes risk to the pool under a treaty reinsurance agreement. The insurer may be a part owner of the pool and may assume a quota share of the pool risk. Some pools are operated by states to provide capacity for hard-to-place risks.
The committee was told that the establishment of a reinsurance or disaster pool for Northern Australia is not a new idea, with a number of submitters noting that 'various governments have given consideration to the establishment of a disaster pool for the north'.
The committee received evidence supportive of the establishment of a reinsurance pool for Northern Australia. For example, Mr Nicholas Scofield, Chief Corporate Affairs Officer, Allianz, told the committee that Allianz:
… have been an advocate of the pool going back to the Natural Disaster Insurance Review in 2011 that was held after the South-East Queensland floods and Cyclone Yasi. Essentially, when you broke down the premiums between properties in Northern Australia and properties in southern Australia, the cost of reinsuring the cyclone risk was a major component. In fact, it's probably the largest single component. We came to the view that reducing that cost would flow through to lower premiums, but it would also address the reason why there is, as referred to by the ACCC, a concentrated market and so-called soft competition, because it actually takes away the exposure that is, if I can say, scaring insurers away from insuring in the north.
Some witnesses were in support of a reinsurance pool. Mr Ross McLennan, Chief Executive Officer, Townsville Chamber of Commerce, expressed his support for the concept. Mr Kingsberry, Townsville Zone Chair, Real Estate Institute of Queensland, said:
There has been a complete market failure. Under the current conditions, there is no business drive and there is no business appetite to fill that gap. I think government really needs to step in and do something about it, and that reinsurance pool certainly makes sense to me.
Councillor Jenny Hill, Board Member, Local Government Association of Queensland, and Mayor of Townsville, noted the potential benefits of a reinsurance pool:
There's no doubt that it's very difficult to get reinsurance for areas in Australia, particularly based around natural disasters. I believe that the reinsurance pool will give that protection or that ability for companies; rather than going offshore to seek reinsurance, it will give them a level of coverage here and allow them to drive the pushing down of their costs.
Ms Kate O'Loughlin, General Manager, Government Relations and Industry Affairs, QBE Australia Pacific, noted that QBE was currently exploring this area:
It is fair to say from QBE's perspective that, at the roundtable in Townsville that was held with the Assistant Treasurer in late 2019, QBE indicated that we would certainly be prepared to explore the feasibility of a reinsurance pool. We do think, as I am sure the committee is aware, that there are a lot of complexities, and the devil is in the detail. If you look at overseas experience, some of these reinsurance pools have worked well but some have actually worked really poorly. We think that, if a pool is to be contemplated, it is about how it is designed, and how the incentives in it work so that you continue to reduce the risk—that is, through mitigation. From our perspective it also needs to be a collaborative arrangement among the states, the federal government and the industry.
Other witnesses, however, expressed concern about the cost, complexity and effectiveness of establishing a reinsurance pool in Northern Australia. To this end, Mr Sullivan, Head of Risk and Operations, ICA, told the committee that a number of inquiries had looked at the establishment of a reinsurance pool and:
Each one of those inquiries has come to the same conclusion: that the liabilities are large and the effect, in terms of reducing premiums, is marginal. So the costs are very high. The benefits are a little bit low.
Similarly, Ms Delia Rickard, Deputy Chair, ACCC, told the committee that the ACCC had looked closely at the issue of an reinsurance pool and where they had been used around the world:
What we found and saw was usually government reinsurance pools are only considered where it is impossible to get reinsurance. We did not find an availability problem here. The insurers that we spoke to all said that they were still able to get reinsurance, so it was available. We also realised that, with a government reinsurance pool, there were a range of issues. You could not ensure that any reduction in price would be passed through to consumers rather than kept by the insurer because, as I have said, there is very soft competition there.
However, it is worth noting that the ACCC does consider direct subsidies to be a better alternative to a reinsurance pool. In the ACCC's Final Report as part of its Northern Australia insurance inquiry, it stated:
We investigated the relative merits of a range of measures including government reinsurance pools, government insurers or mutuals, direct subsidies, mitigation programs and licence conditions. If governments want to intervene to provide immediate relief to consumers facing acute affordability pressures, they should consider direct subsidies over other measures. Direct subsidies have the greatest potential to work in a targeted way to relieve some of the acute affordability and cost of living pressures facing consumers in higher risk areas, at a lower cost and more effectively than other measures.
The ACCC also made an explicit recommendation (Recommendation 8.1) that direct subsidies should be considered over other measures, including reinsurance pools.
Mr Andrew Hall, Chief Executive Officer, ICA, commented on the complexity of establishing a reinsurance pool. He told the committee that:
It's very easy to describe a reinsurance pool. Once you get down to the next level of detail about what its scope is, you would need to ask: how would it be funded? How is it set up? How would it provide relief? How would you define affordability? They are all very challenging questions.
Others suggested that there may be more effective mechanisms for reducing the costs of insurance in Northern Australia rather than through the establishment of a reinsurance pool. Drawing on international examples, Mr Sullivan, ICA, told the committee:
If you look at international examples of pools where they had not tied in a rigorous mitigation program to, over time, drive down the risks and therefore reduce reliance on the pool, what you find is that, now that insurance has become cheaper, there is a great temptation for people to simply build more assets in higher-risk locations. There is no pricing disincentive to them doing that, because you've got cheap insurance access through a pool. So without coupling it to robust mitigation, and perhaps even putting a life expiry on the pool itself to actually drive that process, what you find—again, there are many international examples of this—is that the pool's exposures simply continue to grow over time, and at some point they become completely untenable. I think the last number I heard out of America for their flood pool was in the vicinity of $25 billion in debt. That's because for a very long time they did not try to reduce the exposure; they just kept paying claims out and people would rebuild the homes in the same location, the same place, and not protect them.
Similarly, Mr Tim Buckett, Executive General Manager-Consumer, Suncorp Group, explained that:
Our opposition to a pool is more about the method. It is a matter of fact that premiums are high in Northern Australia. It is a matter of fact that the reason those premiums are high is because of the high peril risk. Our view is that to sustainably reduce premiums we need to sustainably reduce the peril risk. Therefore we strongly advocate for investment in mitigation resilience, reduction of taxes on property insurance and changes to planning laws and building codes.
Additionally, it is well worth noting that climate change will continue to increase the risk and associated costs of natural disasters, particularly in volatile areas such as Northern Australia. Mr Michael Willard, First Assistant Secretary, Immigration and Community Protection Policy, Division, Department of Home Affairs, described to the committee how the Emergency Response Fund was creating a risk reduction framework to combat just this threat. This issue is discussed further in chapter 10.
Other submitters told the committee that because a reinsurance pool had been put in place for terrorism, a reinsurance pool should be created for insurance in Northern Australia. Ms Margaret Shaw suggested 'that we should be looking at expanding the terrorism reinsurance pool to include all natural disasters'.
Similarly, Mr Ross McLennan, Townsville Chamber of Commerce, told the committee:
If you have a reinsurance pool, it is for a defined thing; at the moment it is terrorism because there was a defined market failure. We could expand that reinsurance pool to cover cyclone, for example. The Allianz report to the ACCC report said, 'If you take "cyclone" out of premiums in Northern Australia, we will re-enter the market and they will be 51 per cent cheaper'—because you have eliminated that particular risk where the market failure is.
Whereas, Ms Delia Rickard, Deputy Chair, ACCC, drew a distinction between the situation with insurance in Northern Australia and the establishment of the reinsurance pool for terrorism. Ms Rickard told the committee:
The reinsurance pool for terrorism was put in place because the insurance sector withdrew from insuring there. It was not available, so it was a way of ensuring access to insurance for terrorism purposes. Luckily, we haven't had to draw upon it at this stage. It was a different problem that we were confronting in terms of reinsurance in Northern Australia because the message we got from insurers was that reinsurance was available. All bar one insurer didn't think we needed to have a government reinsurance pool; so they are quite distinct scenarios.
Similarly, Mr Nick O'Kane, Director, Gas Transport and Storage, ACCC, explained:
What we saw when we investigated in Northern Australia was that insurance was generally available for home contents and, to a lesser extent, strata. Of course, that doesn't mean it's as readily available as it is in the rest of Australia, and there are some parts of Northern Australia that have fewer insurers offering insurance. But we really didn't see anything like the availability issues that have been the case in other jurisdictions where insurance pools have been introduced.
Furthermore Mr O'Kane, explained the different risk profiles between terrorism attacks and natural disasters:
… with reinsurance pools, there's a very different risk profile between terrorism attacks—which, thankfully, are very rare—and something like natural catastrophes where you could expect to have claims each and every year, and sometimes very large claims.
The committee received a range of evidence to illustrate how investment in mitigation could reduce both the social and economic costs of natural disasters and reduce or stabilise insurance premiums.
In the Productivity Commission's 2014 inquiry into natural disaster funding, the Productivity Commission recommended that 'Australian Government mitigation funding to states should increase to $200 million a year and be matched by the states'. The report recommended a relief package that involved:
reducing Australian Government post-disaster support to states to sharpen their incentives for mitigation and insurance;
significantly increasing Australian Government support for mitigation;
more transparent budget treatment of natural disaster risks; and
establishing accountability frameworks that reduce prescriptiveness and give states more 'earned autonomy' on how to best undertake recovery and mitigation.
The Northern Australia Insurance Premiums Taskforce (NAIPT) Final Report, found that 'mitigation to reduce the risk of damage from cyclones is the only way to reduce premiums on a sustainable basis.' The NAIPT also outlined a number of significant benefits from mitigation, including:
Reducing the vulnerability of older buildings (those built prior to the introduction of the current building codes) to cyclone damage by strengthening roof structures could yield reductions in claims and, therefore, premiums.
Strengthening and sealing openings in modern buildings would reduce damage from water ingress, which is a significant source for claims. Further, the efforts of residents to secure properties to reduce debris damage to their own and neighbouring buildings could lower claims and premiums. Insurance companies estimate that mitigation actions could reduce premiums for some properties by up to 20 per cent. The benefits of mitigation are much wider than reducing the likelihood of insurance claims. Property owners benefit to the extent that less vulnerable properties are associated with reduced chance of physical injury, as well as reduced emotional trauma that is associated with individuals experiencing significant damage to their home and contents.
However, the Federal Government announced in its response to the report that it would not be implementing the recommended reforms, stating:
… the Australian Government does not propose to pursue these recommendations at this stage. However, as part of the upfront recovery funding model the Government is actively exploring the option of states using any efficiencies realised following the actual reconstruction of essential public assets on future disaster mitigation activities.
The Federal Government did establish the Emergency Response Fund (ERF) via the Emergency Response Fund Act 2019 on 12 December 2019. The fund provides for, from 2019-20:
$150 million available each financial year to fund emergency response and recovery following natural disasters in Australia that have a significant or catastrophic impact; and
$50 million each financial year to build resilience to, prepare for or reduce the risk of future natural disasters, and build the long-term sustainability of communities that are at risk of being affected by a future natural disaster.
In its submission to the committee, the ICA stated that 'whilst a range of options to reduce insurance premiums have been canvassed, the only sustainable approach endorsed by key stakeholders is to reduce the risk through comprehensive mitigation'.
At the time of writing, no funds have been spent from the ERF, either for recovery or mitigation, despite over $370 million being accrued in interest since the fund's establishment.
The ICA also told the committee that in December 2020, it had identified 'a list of priority mitigation projects and requirements that, if delivered and if funded, would result in premium compressions for individuals in the north.' The ICA estimated that 'most of those projects, if delivered, will start to deliver premium compressions in the vicinity of 20 per cent in targeted areas'.
In March 2021, Mr Andrew Hall, Chief Executive Officer, ICA, told the committee that the ICA had provided the priority list of mitigation projects to the Australian Government. In an answer to a question on notice to the committee, it was confirmed that:
the Commonwealth is to fund an estimated $1 million to an experienced architect to drive a project to achieve the codification of retrofitting standards, so that insurers can consistently recognise household flood resilience retrofits; and
the Commonwealth is to fund the Queensland Government to continue the Household Resilience Program up to $20 million.
Furthermore, funding is to be provided to the Townsville City Council, the Hinchinbrook Shire Council, the Cairns Regional Council, the Fraser Coast Council, the Western Downs Regional Council, the Rockhampton Regional Council, the Bundaberg Regional Council, and the Mackay Regional Council for various mitigation works.
Mr Tim Buckett, Executive General Manager-Consumer, Suncorp Group argued that, 'to sustainably reduce premiums we need to sustainably reduce the peril risk'. Mr Buckett told the committee:
… that insurance premiums are high in Northern Australia and North Queensland because the cost of the peril which is the risk that the insurer is covering is higher than in the rest of Australia. The way to materially and sustainably reduce premiums is to reduce the cost of that risk. We believe action around mitigation is the right path.
In advocating strongly for mitigation, Mr Buckett, outlined the economic and social benefits of mitigation:
… people are protected, there is less suffering, less human suffering and less loss that occurs when an event occurs, because those communities are more resilient, and you miss out on that activity if you don't get the right price signals today and invest in mitigation today.
Other witnesses explained the medium and long-term benefits from investment in mitigation. Mr Andrew Hall, Chief Executive Officer, ICA, told the committee that:
… there is a medium and a long-term benefit from resilience and mitigation funding. If we can improve the mitigation of the disaster impacts on communities through flood levees and the like, if we can uplift the building standards to make sure that building resilience and not just survivability is key to how buildings are constructed in these areas, it has a medium and a long-term impact.
Witnesses provided examples of how investment in mitigation had resulted in increased affordability and availability of insurance in Northern Australia. For example, Suncorp highlighted the significant benefits of physical mitigation measures such as flood levees for high risk communities. Suncorp observed that:
Homeowners in Roma saw their insurance premiums reduce by as much as 90 per cent after their town's flood levee was completed.
Similarly, Ms Delia Rickard, Deputy Chair, ACCC, told the committee:
We see that there is an important role for mitigation. We looked at two types of mitigation. [There] is community-level mitigation, which is mainly relevant regarding floods. We've seen that in places like Roma, where proper mitigation put in place has had a significant impact on the cost of insurance and prices have fallen significantly. With a lot of the damage in northern Australia as a result of cyclones, it's much more difficult to do that community-level mitigation work there, and work there goes more to the household level. We very much support steps towards household mitigation. We think it's important that insurers are up-front and commit to the kinds of reductions in price that they will put in place for mitigation.
In another example, Suncorp stated that:
The Launceston flood levee is an example of the benefits of community-level mitigation. In 2014, the old Launceston flood levee was upgraded and raised. Subsequent analysis revealed the levee upgrade paid for itself four times over after just one flood event.
Suncorp also suggested that investment in mitigation against disaster events could facilitate growth and reduce risk in Northern Australia, noting that:
… flood mitigation investment in high risk areas such as Townsville, will create a more welcoming investment environment, where there are proactive measures taken to reduce risk, and effectively lower insurance premiums. This allows communities to expand, encourages job and population growth, and creates a stronger economy.
Other submitters, highlighted the importance of improved building codes and better land planning to reduce risk. Mr Phuong Ly, Chief Underwriting Officer, QBE Australia Pacific, told the committee:
… just reiterating what's already been said around the importance of risk mitigation—improved building codes and better land planning, if they use planning, are all key components in reducing the underlying risk.
Similarly, Councillor Jenny Hill, Board Member, Local Government Association of Queensland, and Mayor of Townsville, told the committee that:
We need more research into mitigation around floods and effects of temperature. We saw damage that occurred in the floods where better building practices should have been implemented.
Other submitters suggested that governments may need to reconsider how they think about infrastructure for mitigation purposes. Mr Andrew Hall, ICA, told the committee that:
Mitigation can be thought of as a piece of national infrastructure. When highways and rail lines are being built, for example, they could be built to a level that actually provides a levee around a town. There are ways of thinking about how we can divert the rapid exit of water in areas where there is high rainfall and be able to protect assets better. So across the board I think there needs to be a shift in all levels of government in the way they think about infrastructure for mitigation purposes.
Household Resilience Program
The committee heard evidence about the effectiveness of the Queensland state government's Household Resilience Program, which provides funding to help eligible home owners in coastal parts of Queensland improve the resilience of their homes against cyclones. The $21.25 million Household Resilience Program is part of the Queensland Economic Recovery Strategy: Unite and Recover for Queensland Jobs, which has been designed to help the state recover from COVID-19. For the Household Resilience Program, $11.25 million was funded by the Queensland Government and $10 million was funded by the Australian Government.
Mr Sullivan, ICA, told the committee that the program:
… allows an individual who owns a property and meets the eligibility criteria to receive a grant, which is funnelled into a panel of builders who will retrofit the property to lift it from a non-cyclone-compliant standard to either a compliant standard or something very, very close. What it does is render the person's highly vulnerable property into a far less vulnerable property.
Mr Sullivan noted that the Household Resilience Program has provided, 'discounts of up to 20 per cent… for individuals who participated in that program'. Similarly, Mr Hall, ICA, told the committee that the program
… which has been run over the last couple of years, and recently renewed, resulted in an average insurance premium reduction of around 7.5 per cent, with some reductions up to 25 per cent. This program demonstrated how government funding, a combination of both state and federal, can be used to incentivise homeowners to invest in their own resilience and how insurance premiums can be reduced by reducing that risk.
Suncorp observed that the Household Resilience Program demonstrates how governments can assist homeowners improve the resilience of their own properties, noting 'that the program has already provided funding for around 1,000 homes in north Queensland to receive roof upgrades and other cyclone mitigation measures'.
Suncorp also noted that 'government sponsored mitigation solutions have also been highly successful internationally, and a similar model to the Queensland program should be considered for Northern Australia, either through the provision of grants or a loan scheme via the NAIF'.
Northern Australian Infrastructure Facility
A number of submitters suggested that consideration could be given to using NAIF funds for mitigation needs. The ICA urged 'consideration of how the Northern Australia Infrastructure Fund could be employed more effectively to fund mitigation needs, reducing risks to highly exposed communities and as a consequence reducing insurance premiums currently impacting residents and businesses.'
Similarly, Suncorp suggested that the NAIF could be utilised to 'reduce the impact of natural hazards while stimulating economic growth by improving both community and household-level resilience'. Suncorp stated that:
Investment in protecting communities against natural disasters such as floods and cyclones aligns to the existing objectives of the NAIF. Such measures should be seen as economic infrastructure which helps to ensure that regional communities, as well as their economies, are better protected against the impacts of natural disasters.
Noting that 'these outcomes are in line with the NAIF's purpose of generating public benefit, facilitating long term economic and population growth, and ensuring greater private sector participation in investment', Suncorp further suggested:
The NAIF could support community-level mitigation such as flood levees and infrastructure upgrades, as well as via concessional loans to fund household resilience upgrades. These initiatives will help build resilient communities, make better use of existing infrastructure, and prevent major damage caused by disasters.