ACCC can’t find any takers for the Cyclone Reinsurance Pool despite a late 2023 deadline

It was touted as a way to fix huge insurance price hikes for at risk homewoners but the flagship cyclone reinsurance policy has failed to attract a single insurer.

Drone pictures of the devastation caused by Ex-Tropical Cyclone Seroja after it crossed over the West Australian town of Kalbarri. Picture: Grahame Kelaher

No insurer has signed up to the former Coalition federal government’s flagship policy to cut premiums for properties in cyclone zones.

A report from the Australian Competition and Consumer Commission says the Cyclone Reinsurance Pool risks worsening affordability in some scenarios and may not deliver forecast cost reductions.

The $10bn Cyclone Reinsurance Pool, which commenced operation in July 2022, was touted by the then Morrison government as a solution to rapidly escalating affordability issues for building cover in Australia’s top end.

The pool aims to offer reinsurance for insurers who write some 880,000 residential, and small and medium business policies in northern Australia, and would pick up some of the costs from cyclones which hit the top end.

The ACCC report says insurance premiums for combined building and contents policies were on average more than $1000 above the rest of Australia, while strata cover was more than double the cost than the rest of Australia.

Major insurers will be required to sign on to the Cyclone Reinsurance Pool by the end of 2023. Small insurers must make use of the pool by 2024.

However, no major insurer has signed up to the pool, according to the ACCC.

The ACCC report says only Allianz has expressed an interest in joining the pool through its household portfolio, and most other insurers were unlikely to join until close to the legislated deadline.

The pool requires insurers to pay reinsurance premiums to the Australian Reinsurance Pool Corporation as they join the pool, in a scheme aimed at collecting $776m per year.

But the ACCC notes insurers warned that the reinsurance pool may actually increase the overall cost of their reinsurance, requiring them to purchase cover outside the pool.

“Several insurers have expressed views that removing (or substantially reducing) private reinsurers’ ability to cover cyclone-related events will effectively increase reinsurers’ relative exposure to non-cyclone related risks in Australia – and this reduction in risk diversification may result in reinsurers increasing premiums for non cyclone risks,” the ACCC report said.

The pool has been estimated to pull down premiums by as much as 37 per cent in strata lines, while residential and home policyholders may see a 13 per cent discount.

However, the ACCC identified concern among insurers that the pool will not deliver its promised discounts, nor has it been given powers to require insurers pass on discounts.

Several insurers told the ACCC the rules of the Cyclone Reinsurance Pool would require them to collect more information from their customers, which could complicate the purchase process.

“One insurer noted that if they can’t obtain the more detailed information about variables, such as building characteristics, a higher reinsurance default amount corresponding to the

highest rating factor will be applied to that policy,” the report notes.

“This may result in higher ARPC reinsurance premiums, and policyholders paying more under the pool to cover this higher risk rating, while their risk may in fact be lower.”

The ACCC report finds insurers are concerned about the overly restrictive time periods the pool would offer cover for.

The Cyclone Reinsurance Pool only covers losses arising within 48 hours after a cyclone ends.

This is shorter than the seven-day period often used within the insurance industry for weather events.

“One insurer provided examples of cyclones in Australia’s history (namely Cyclones Yasi and Debbie) where 48 hours would have provided insufficient coverage,” the ACCC report notes.

“One insurer summarised their position on the claims period by stating ‘the claims period will do more harm than good, and will hold the pool back from achieving its objectives.”

The Insurance Council of Australia said the ACCC’s report highlighted the need to drive “sustainable relief to people’s premiums” through long-term investment.

“Insurers are committed to working with the Federal Government and communities to improve affordability and availability of general insurance for all Australians, particularly those in northern Australia who are vulnerable to worsening extreme weather impacts as a result of climate change,” an ICA spokeswoman said.

Originally published as ACCC can’t find any takers for the Cyclone Reinsurance Pool despite a late 2023 deadline