The Australian Reinsurance Pool Corporation (ARPC) has released the details of an actuarial report analysing the impacts of extending the Cyclone Pool coverage period from 48 hours to 168 hours after a declared cyclone event ends.
This report, commissioned at the request of the Assistant Treasurer, was conducted by Finity Consulting and Risk Frontiers and found that the extension is likely to raise premiums but could also have a positive effect on higher-risk properties.
Currently, the Cyclone Pool covers cyclone and related flood damage occurring within 48 hours after a cyclone ends. The proposed extension aims to address the issue of significant rainfall and flooding that often occur beyond this period, as observed in recent events such as Cyclones Ellie, Jasper, and Kirrily.
The actuarial modelling indicates that extending the coverage period would increase the average annual loss (AAL) of the Cyclone Pool by AU$20m (US$13.37m) to AU$35m, or approximately 5%. This would necessitate additional premium collections to cover the increased claims costs, with the report exploring potential adjustments to the Cyclone Pool’s premium rates to accommodate the extended coverage period.
“Under an extended coverage period, the Cyclone Pool would update current address-level flood risk bands for impacted addresses to reflect the increased flood cover being provided by the Pool,” Finity said in a letter on the report.
“Despite this, it is likely that there would need to be changes to the Cyclone Pool’s premium rates and/or the premium rating formula, as maintaining the current structure and premium rating parameters will not collect the additional premium needed to meet the increased costs,” Finity added.
According to Finity, the impact on consumers depends on how insurers adjust their premiums in response to the change.
However, the actuarial consultant added that “Across most regions, the number of Home Building insurance consumers receiving premium increases will be greater than those receiving premium reductions, although the vast majority of policies receiving increases will see very small (under ~AU$5 on average) increases whereas those benefitting from premium reductions are likely to see more substantial premium reductions (AU$100+ on average).”
The reinsurance pool was designed to deliver the greatest benefit to the highest-risk properties, and the chances would likely see those properties paying ‘well below’ what they would otherwise be charged.
While noting limitations to the study, Finity said that “Regionally, consumers in high flood risk regions (such as SEQ) stand to benefit the most from the increased coverage as, depending on insurer responses, their non-cyclone premium reduction might outweigh the cyclone pool premium increases, which are capped.”
Risk Frontiers’ analysis highlights that a 168-hour window is more adequate for capturing flood peaks in medium to large river basins, which can take longer for floodwaters to accumulate. Its report suggests that extending the coverage period to 168 hours would better capture the flood risks associated with cyclones, and should reduce disputes about when flood damage occurs.
However, a summary of the report also notes that “For extremely large basins, the 168-hour window is insufficient to capture extreme TC-related flood peaks.”
It also adds that the impact on consumer premiums will depend on how insurers adjust their premiums in response to the increased coverage offered by the Cyclone Pool. Insurers may either pass on the increased Cyclone Pool premiums to consumers or reduce their premiums for retained risks, based on their assessment of the change in risk.
