The Australian Reinsurance Pool Corporation (ARPC) has released its pool premium and exposure statistics for 2023, reporting significant progress in the coverage of its Cyclone Reinsurance Pool — achieving approximately 95% coverage of eligible risks in Northern Australia.
In a separate report, the APRC said that an analysis of seven insurers, conducted by Finity Consulting, found that policyholder premiums for the highest cyclone risk bands decreased by 38% from pre-cyclone pool premiums and that quote success rates have increased for policies with high cyclone risk.
However, recent findings from the Australian Competition and Consumer Commission (ACCC) and the Australian Consumers Insurance Lobby Inc. (ACIL) appear to conflict with this analysis, with both suggesting that the pool has yet to achieve its goal of reducing premiums in cyclone-prone areas.
Industry experts have also pointed to the Pool’s potential shortcomings, calling for more government support if Australia’s affordability issue is really to be addressed.
Launched on 1 July 2022, the Cyclone Reinsurance Pool was established under the amended Terrorism and Cyclone Insurance Act 2003 to provide insurers with reinsurance against cyclones and related flood damages.
It targets support for cyclone-prone regions, particularly Northern Australia, aiming to make insurance more accessible and affordable by “Driving down premiums for cyclones and related flood damage.”
We only need to look back to December to see Australia’s last cyclone. Cyclone Jasper, which hit North Queensland has resulted in 10,000 claims and AU$296m (US$194.8m) in insured losses, according to the Insurance Council of Australia’s April numbers.
However, in a critique of the Pool, Sure Insurance Managing Director Bradley Heath at the time pointed out a key weakness: it only covers damage within 48 hours of a cyclone, which missed subsequent major flooding impacts in Queensland’s Far North.
“We’re disappointed in it and I’m sure a lot of other insurers are,” Bradley said, adding, “These costs should have been covered by the pool if it was designed correctly — now that extra cost is likely to be passed on.”
Queensland Emergency Services Minister Murray Watt also added, “We’ve all been sceptical whether the re-insurance pool would be as effective as was claimed, and unfortunately, we seem to be seeing that now.”
A look at the numbers
So what do the numbers say?
Let’s start first with the coverage. According to the ARCP’s latest statistics, accurate up to 31 December 2023, the pool now covers over 3.1 million buildings, with an aggregate exposure exceeding AU$2.04 trillion (US$1.35 trillion). It includes participation from 13 insurers for home, eight for strata, and eight for SMEs.
Divided by class of business, home insurance accounts for 87% of the annual cyclone pool premium, followed by strata at 9% and small and medium enterprises (SME) at 4%.
The total number of buildings covered is 3,018,275 for homes, 78,242 for strata, and 86,809 for SMEs, with corresponding aggregate sums insured of AU$1.708 trillion, AU$266bn, and AU$68bn, respectively.
Contents insurance covers 3,128,734 homes and 158,963 SMEs, with sums insured amounting to AU$299m and AU$27m. Business interruption risks, covered solely under SMEs, account for 73,512 risks with a sum insured of AU$25m.
According to ARCP’s data, the average annual cyclone pool premium per risk is AU$170 for homes, AU$715 for strata, and AUS$262 for SMEs.
The Combined Rate on Line—the percentage of the insurance premium compared to the total sum insured—is 2.57% for homes, 2.10% for strata, and 1.95% for SMEs.
CRESTA zones
The data also offers insight into reinsurance coverage across different Catastrophe Risk Evaluating and Standardising Target Accumulations (CRESTA) zones in Australia.
It’s important to note that the metrics provided omit properties in CRESTA zones identified, by ARPC’s premium formula, as having no cyclone risk.
The total average premium is $151, with a Combined Rate On Line of 2.7% per $100 sum insured, covering 3,018,275 building risks.
High-risk areas such as Pilbara—which had a premium of AU$2,137—as well as Proserpine and Offshore Islands, and Kununurra-Broome face the highest premiums, indicative of their greater exposure to cyclone threats. While regions like South-West NSW— which contributes just $0.1 on average—and the Northern Slopes exhibit markedly lower rates.
According to the data, there is also uniform protection against wind damage at 100% across all zones. However, coverage for storm surge and flood risks varies significantly by location.
The Proserpine and Offshore Islands zone has the highest protection against storm surge, at 76%, while the lowest is in the Mid-North coast zone, at 25%. Flood coverage is most comprehensive in Darwin, at 100%, with the Northern Slopes region having the least, at 75%.
On average, 52% of homes are covered for storm surges and 86% for flood risks, indicating a disparity in coverage levels for these specific perils across the country.
Overall, ARPC’s data shows much progress has been made with the Reinsurance Pool. 95% coverage of eligible risks in Northern Australia, with a total of 3.1 million buildings and an aggregate exposure that exceeds AU$2.04 trillion are huge numbers and demonstrate the significant takeup from an industry perspective.
ACCC and ACIL have their say
The Pool has been billed as an essential mechanism for maintaining economic stability in Australia through its ability to help make insurance affordable and accessible.
In its report, the ARPC pointed to an analysis conducted by Finity Consulting on seven insurers, which shows that premiums in the highest-risk band have dropped 38% since the Pool’s introduction.
However, this feedback from industry watchdogs hasn’t been quite as complimentary.
In September 2023, the Australian Consumers Insurance Lobby Inc (ACIL) released its first evaluation of the Pool and found that it has yet to deliver significant consumer savings and enhanced market competition.
The lobby assigned the reinsurance pool a 2 out of 5 on its rating scale, indicating a verdict of “needs improvement.”
“The Pool, as it stands, is observed to offer limited to no substantial savings for consumers. This assessment highlights a gap between the intended benefits and the impact experienced by those it aims to protect. Notwithstanding, many of the stakeholders we spoke to believe the Pool will work with enhancements,” noted the report.
The Insurance Lobby highlighted several areas for improvement, including the need for a more rigorous ongoing assessment of the Pool’s impact on consumers and market dynamics. Recommendations also include enhancing transparency in modelling, adjusting eligibility criteria to include more properties and businesses, and incorporating marine insurance due to its significant challenges in Northern Australia.
Australian Consumers Insurance Lobby
In December, the ACCC released its second annual insurance monitoring report which indicated that it was too early for the cyclone reinsurance pool to have affected insurance premiums in Northern Australia in any significant way.
Its data suggested that considerable year-on-year increases are still occurring throughout Australia in 2022-23, with the Northern Territory home, strata, and SME policies seeing double-digit across the board.
“The increase in nominal terms was most pronounced in the rest of Australia (15%) but the northern regions still experienced continued growth in premiums: the Northern Territory (13%), North Queensland (7%) and North Western Australia (4%),” the ACCC said in its report.
“We continue to hear about the financial pressures that consumers, strata owners and small businesses in Northern Australia face to obtain the insurance they need,” ACCC Commissioner Peter Crone said in the report.
However, Crone also acknowledged the pool’s transitional nature, noting various factors, including insurers’ timing of entering the pool, the time they need to implement pricing changes and policy renewal cycles. This means full effects on premiums might not be immediately observable for consumers.
“There is also a range of other factors impacting insurance premiums, such as higher building replacement costs and global reinsurance market conditions. And as we know, a changing climate is expected to exacerbate extreme weather events in future,” Crone said.
The ACIL and ACCC assessments appear to be in conflict with Finity Consulting’s data. There are likely a number of reasons for this, one of which is a difference in methodologies and sample sizes used.
An increase in premiums also doesn’t necessarily mean the pool isn’t doing its job – particularly given the hard reinsurance market that the industry is going through.
But added together, it’s difficult—and perhaps too early—to tell just how successful the pool has been in achieving its goals of decreasing premiums.
However, one thing that seems clear is that improving affordability in the country will require a multifaceted approach that goes beyond the Pool.
Peter Crone
ACCC CommissionerInsurance affordability
A key reason the pool was developed was in response to the complex and growing challenge of insurance affordability in Australia.
General insurance affordability has been exacerbated by events such as Australia’s 2022 floods, which, while not a cyclone event, not only caused huge losses for insurers but also resulted in a parliamentary inquiry into their responses to 2022 major flood claims.
The affordability issue is a complicated one. The industry and government have sought solutions to alleviate the financial burden on homeowners and the industry, including short to medium-term solutions, such as more tailored products, the potential for parametric, and the cyclone reinsurance pool.
In a March interview with (Re)in Asia, Nicholas Scofield, Chief Corporate Officer at Allianz Australia, said the pool aims to reduce the effects of cyclone risks by permitting insurers to apply market-equivalent premiums without adding a profit margin. But he also pointed to a vital issue.
“The problem with the cyclone reinsurance pool is that it was set up without any government subsidy, which means that it has to internally generate money,” Schofield said.
“You can’t close the funding gap with just this kind of internal money-shuffling exercise. You need to put a government subsidy into the system,” he added.
Nicholas Scofield
Chief Corporate Officer at Allianz AustraliaIn the ACCC report, Commissioner Crone was right to say that it will take some time for the pool’s full impact to be seen. However, with insurance rates rising, the effectiveness of the cyclone reinsurance pool in and of itself having a significant impact on insurance affordability will remain under scruitiny.
The broader industry consensus is that, while initiatives like the pool provide benefits, there needs to be development on long-term strategies.
These strategies include better risk management and mitigation strategies, through initiatives like the Hazard Insurance Partnership (HIP), as well as the potential of industry data sharing and are seen as critical to helping ease the pressure of insurance affordability in the country (see story below).
