19 Sep 2024 Cyclone reinsurance pool begins delivering some savings The Government’s cyclone reinsurance pool has begun delivering lower premiums for some consumers in some[...]

The Australian Government's cyclone reinsurance pool has begun delivering lower premiums for some consumers in some regions facing higher risk of cyclones, the ACCC's third insurance monitoring report has found.

However, the savings generated by the reinsurance pool have been offset to varying extents by other cost increases affecting insurance markets. These costs include the broader hardening of global reinsurance markets, extreme global weather events, and price increases of building materials and labour.

Premiums remain very high for many consumers and are generally rising nationally, and insurance affordability remains a key concern in many communities.

"We have seen that the pool has led to some savings for insurers writing policies in higher cyclone risk regions of Australia. Insurers are making changes to pass these savings on to consumers, and also to better recognise specific mitigation measures consumers have implemented," ACCC Deputy Chair Catriona Lowe said.

"However a range of factors including a hardening of global reinsurance markets and extreme global weather events are contributing to these savings being less apparent to consumers, who continue to face very high insurance premiums."

"Our engagement with the community has reinforced the importance of more affordable insurance premiums across northern Australia. We continue to hear consumers say that the cost of insurance for their home or small business has become prohibitive, forcing them to risk underinsurance or go without insurance at all," Ms Lowe said.

The ACCC's third annual insurance monitoring report comes as all large insurers have joined the pool and small insurers remain on track to meet their 31 December 2024 deadline. However, changes to premiums have not been instant.

"Different insurers entering the pool at different times as well as the time needed for insurers to implement pricing changes has meant the transition to the pool has been long and gradual," Ms Lowe said.

"For consumers anticipating the benefits of the pool, it has been a long wait, particularly as potential savings from the reinsurance pool may not be seen until they renew their policy or take out a new one."

Over time, the ACCC's monitoring will provide information and data to help examine the impact of the pool on prices, costs and profits of insurance.

"Our work should allow governments to evaluate whether the pool is delivering outcomes as intended," Ms Lowe said.

"We are optimistic that the pool can achieve some premium savings and benefits for consumers at higher risk of cyclones, but the pool, on its own, won't solve acute affordability concerns."

The ACCC also continues to believe that there remains significant merit in many of the recommendations we made in our Northern Australia Insurance Inquiry to improve the way insurance markets are working for consumers.

Reinsurance pool leads to premium relief for some consumers

In its report, the ACCC examined policy-level price data to compare insurancepolicies renewed before and after an insurer joined the reinsurance pool.

Of the combined home and contents insurance policies in areas of medium to high cyclone risk which were renewed by a consumer after their insurer joined the pool, the ACCC found that 27 per cent experienced a premium decrease.

For comparison, only 12 per cent of home and contents policies in areas of medium to high risk cyclone risk , which were renewed by a consumer before their insurer joined the pool, experienced a premium decrease.

Similarly, the ACCC found that 16 per cent of strata policies in areas of medium to high cyclone risk experienced a premium decrease upon renewal after the insurer had joined the pool, compared to 10 per cent for consumers that renewed before their insurer had joined the pool.

The impact of the pool on insurance quotes for new customers for home and small business insurance was also examined as part of the ACCC's report.

The ACCC found home insurance premiums quoted in higher cyclone risk regions had an average decrease of 8 per cent to 15 per cent across different relative levels of wind risk, through to as high as a 24 per cent average decrease for regions with the highest risk.

In contrast, the ACCC found in lower cyclone risk regions, quoted prices increased by up to 14 per cent. This suggests that the cyclone reinsurance pool is helping to reduce the price of insurance for some consumers in regions of medium to high cyclone risk.

Consumers still facing high premiums

Despite experiencing some premium reductions as a result of the reinsurance pool, home, strata and small business insurance premiums remained much more expensive in northern Australia where cyclones are more prevalent, compared to the rest of Australia.

The ACCC found that in 2023, the median premium for a combined home and contents insurance policy was highest in north Western Australia at $4,376, the Northern Territory at $3,054 and in north Queensland at $2,959. In comparison, the median premium in the rest of Australia was $1,781.

Premiums have continued to rise across the country, with median premiums rising 3 per cent in north Western Australia and 11 per cent in both the Northern Territory and north Queensland. The highest rise was in the rest of Australia, with the median premium increasing 13 per cent from the previous year.

This may be a continuing reflection of significant disasters in southern and eastern parts of the country, including the 2022 floods.

Strata insurance policies, when measured on a per $100,000 sum insured basis, experienced falls in the median premium in both north Western Australia by 5 per cent and 13 per cent in north Queensland. However, the median premium per $100,000 sum insured increased in the Northern Territory by 7 per cent and the rest of Australia by 6 per cent.

Background

Reinsurance is taken out by insurers, typically to protect insurers from significant natural peril events impacting their portfolios, such as cyclones.

The Australian Government established the cyclone reinsurance pool in 2022 to help make insurance more affordable for households and some small businesses who are at higher risk of cyclones. The pool, which is administered by the Australian Reinsurance Pool Corporation, supplies reinsurance to insurers without a profit margin, reducing the cost of reinsurance for insurers.

The pool provides reinsurance to insurers in relation to cyclone and cyclone-related flooding risks covered by home, contents, residential strata and small business insurance (up to a sum insured of $5 million) throughout Australia.

Large insurers were required to join the pool by the end of 2023 and smaller insurers are required to join by the end of 2024. A list of the insurers that have joined the pool is on the Australian Reinsurance Pool Corporation website.

The ACCC has been directed to monitor the prices, costs, and profits of home, contents, strata, and certain commercial insurance policies, before and after the introduction of the government's cyclone reinsurance pool.

The ACCC is required to provide a report at least once each calendar year during the period 1 January 2022 to 30 June 2026.

The ACCC has published this latest report earlier in the year compared with the previous December publication of the 2022 and 2023 monitoring reports. This is to allow key findings from our monitoring to inform the work of the government's Insurance Affordability and Natural Hazards Risk Reduction Taskforce.

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