Pool problem: it’s getting crowded
Ozganics founder Anni Brownjohn, third from left, starts the flood recovery process with the help of friends and family. She says she’s considering relocating
How the northern Australia cyclone reinsurance pool is acting as a catalyst for other high-risk regions facing insurance problems
By Bernice Han
Anni Brownjohn knows firsthand the devastating impact of floods. Her food manufacturing business in Murwillumbah, New South Wales, was not spared when floodwaters swept through the region a year ago.
The waters have since receded, but for Ms Brownjohn, the founder of Ozganics Foods Australia, the recovery process hasn’t.
Production is not yet back to full capacity and new machines she ordered to replace the damaged ones have been delayed by covid-related supply chain constraints. At the same time she is also looking to relocate her business somewhere beyond the reach of future floods.
She’s thankful she decided to have her business comprehensively insured for flood through her broker. While the annual premiums are a “huge expense”, insurance cover has at least partially cushioned the financial damage to her business. Her “significant” claim was accepted, allowing her to go ahead with rebuilding her business.
“It was just too risky to go without insurance,” Ms Brownjohn tells Insurance News.
She is aware of the growing calls for governments to act on the worsening premium affordability crisis in disaster-prone regions. She feels that measures like the cyclone reinsurance pool that commenced on July 1 last year should not be a permanent solution.
“My concern is that if the government steps in, will that mean we stop looking at where we build, how we build?” she says.
“We need to have a wider conversation on how our country and its people adapt as climate events happen with more regularity. The need for a long-term plan that engages all stakeholders at an early stage is critical.”
The historic floods of 2022 have reignited the conversation over how and why governments should or should not intervene in the pricing of natural peril risks. Calls for greater government action on the insurance front inevitably follow after catastrophic bushfires, floods or cyclones strike a region.
The back-to-back floods that pounded several states, but most disastrously Queensland and NSW, have been the catalyst this time.
Politicians are feeling the heat – again, not unusual – as more Australians residing in areas facing elevated catastrophe risks struggle to afford insurance. And in some areas the challenge is even more acute, because affordability isn’t the only stumbling block. A growing number of property and business owners say even if they can afford the premium they can’t find an insurer prepared to cover them.
Last December NSW Premier Dominic Perrottet said a national solution is required and all options should be on the table. He said he will ask National Cabinet – bringing together the prime minister with state and territory leaders – to consider the feasibility of a reinsurance facility to assist flood-affected areas across the country, building on the creation of the $10 billion government-backed Cyclone Reinsurance Pool.
“The insurance companies can’t leave these communities behind. I’m putting insurance availability and affordability in high-risk flood areas on the national agenda.”
Mr Perrottet, whose Liberal-National coalition government is trailing in opinion polls in the lead-up to the March state election, says at-risk communities can’t be left without insurance.
“The insurance companies can’t leave these communities behind. I’m putting insurance availability and affordability in high-risk flood areas on the national agenda.”
Federal Liberal MP Warren Entsch, who represents the north Queensland seat of Leichhardt, agrees.
“We’ve already got a cyclone reinsurance pool here. We can expand that,” Mr Entsch tells Insurance News.
Mr Entsch, who has been pushing since 2010 for government action on insurance affordability, campaigned for the creation of a reinsurance pool. He says mitigation programs to protect communities must also be in the mix.
Berrill and Watson Lawyers Principal John Berrill, one of the co-authors of the 2011 Natural Disaster Insurance Review report, says the cyclone reinsurance program is a start for Australia to explore further what more the government can do to address the insurance challenge.
He says the template for the pool, as flagged in the 2011 report, could be used to examine the feasibility of adding other perils to the scheme.
Increased mitigation spending and tax reforms such as axing the NSW emergency services levy – which is imposed as a duty on insurance policyholders – must be part of the long-term solution too.
And there’s no time to lose. “Climate change has turbocharged the problems here,” Mr Berrill tells Insurance News.
“We’re at the tipping point of market failure in certain areas, and we need to look at options to keep people in the insurance market to the extent that it’s reasonable to do so.
“If we just keep going as we are, the number of people with home and contents insurance is going to drop even more significantly.”
The review, which was set up by the Rudd Labor government following the devastating Brisbane summer floods in 2011, made 47 recommendations. The creation of a reinsurance facility supported by a government guarantee was one of them, but it was not taken up.
In 2015 the Northern Australia Insurance Premiums Taskforce also investigated the feasibility of a reinsurance pool. It found that such a scheme could deliver premium reductions with the support of a government guarantee and promote competition through new entrants to the northern Australia market.
But it also cautioned that a publicly funded pool may make it difficult for the Federal Government to exit in the future.
So for about a decade since the 2011 report Canberra steadfastly resisted the idea, despite the numerous catastrophes that followed, including cyclone Debbie in 2017 and the 2019/20 Black Summer bushfires.
The resistance finally crumbled in May 2021 when then-prime minister Scott Morrison announced a cyclone reinsurance facility for northern Australia backed by a $10 billion government guarantee.
The scheme aims to reduce premiums and increase competition in cyclone-affected regions by foregoing a profit margin.
Large insurers are required to place their cyclone-related risks into the pool by the end of this year while smaller players have an additional 12 months. To date only Allianz and niche home and contents and strata insurer Sure Insurance have joined.
“The question I would ask is, well, where do you draw the line if you try to expand [the pool]? You’ve got flood, you’ve got fire, you’ve got hail. It opens a Pandora’s box. Where does it actually stop?”
While the hesitation of other insurers is, at this point, not an issue, there are rumblings of discontent with the reinsurance scheme. Not everyone is convinced about the merits of a publicly funded reinsurance pool, or even the idea that government should be acting to directly influence the pricing of a risk.
So much for regional cyclones. In the matter of a reinsurance pool for flood across Australia it’s not so easy. The Insurance Council of Australia (ICA) says a flood reinsurance pool won’t stop the physical impacts of flood on property and communities, and may in fact remove incentives to reduce risks.
“The key lever to improve the availability and affordability of insurance is reducing or mitigating the risk that is present,” an ICA spokesperson tells Insurance News.
“That’s why the ICA has been calling for greater investment by governments in measures that better protect homes and communities from the impacts of extreme weather events like flooding.”
In NSW’s case, the State Government could make insurance more affordable right now by removing the Emergency Services Levy from insurance premiums. This would reduce the average home premium by 15% and average business premium by 23%.
ICA says the NSW Government “should also review land-use planning arrangements so no more homes are built on floodplains and future planning decisions consider the risks of a changing climate”.
Allianz is the first insurer to join the cyclone pool and was the only one to support the “intervention” concept when reports raised the issue last decade – but added a caveat that government-funded mitigation programs to reduce premium pressure are an essential ingredient in reducing risk. “All Australians deserve to be able to afford home insurance,” Chief Corporate Affairs Officer Nicholas Scofield tells Insurance News. “That’s Allianz’s simple view.”
Matthew Williamson, who runs his brokerage Good Cover from the town of Bangalow, inland from Byron Bay in NSW, arranged the flood insurance for Ms Brownjohn. He says there is a role for government to play a role in circumstances where there is no other option.
“But that just isn’t the case here,” he tells Insurance News. “There are any number of reinsurers who are willing to participate, and they and the insurers they support have set the price commensurate to the risk.
“The risk doesn’t get better just because the Government is the underwriter.”
KPMG Insurance Partner Scott Guse says he is cautious about expanding the $10 billion reinsurance pool to include other natural perils.
“The question I would ask is, well, where do you draw the line if you try to expand it? You’ve got flood, you’ve got fire, you’ve got hail…
“It opens a Pandora’s box. Where does it actually stop?”
He says that in Australia’s case it would be better to see how the cyclone pool works first before thinking about what other perils to add to the program.
“I’m not against such a pool, but I’m cautiously concerned about the viability of the assumptions and the proposed output of a pool without seeing the actual experience eventuate,” he tells Insurance News.
But the Australian Consumers Insurance Lobby (ACIL) believes the Government needs to act now rather than wait to see if the scheme will deliver in line with the financial modelling.
Chairman Tyrone Shandiman says there is nothing to suggest the scheme won’t succeed despite insurers’ apparent lack of enthusiasm.
“It shouldn’t stop the Government from looking at solutions for other issues,” he says.
It refers to “market failures” that have spread beyond the cyclone-prone region in the north to other parts of the country, where many are finding it increasingly tough to afford and find insurance cover for flood, bushfire and storm surge risks.
ACIL backs mitigation and tax reforms too, but it believes government action in other areas, like the one it undertook with the pool, should not be seen as a one-off.
“There is no turning back,” Mr Shandiman says. “The environment has changed. We’re not climate experts, but all the evidence is pointing to weather being a very big issue for consumers of insurance.”
