Reinsurance Pool Draft Legislation

The Federal Government backed Cyclone and Cyclone-related Flood Reinsurance Pool draft legislation has been released on Friday 4th December. Northern Australia Insurance Lobby (“NAIL”) attended treasury round table discussions on 6th December and the draft legislation was given a resounding thumbs down by those in attendance.

NAIL believes the eligibility criteria and mechanism for savings are core issues that need to be reconsidered prior to legislation being passed, otherwise affordability and availability for insurance in Northern Australia will continue to be a “thorn in the side” of the Federal Government.

Eligibility Criteria - Who’s Missing?

As the reinsurance pool is intended to be cost neutral to the government over time, the eligibility criteria for the reinsurance pool should provide cover for as many consumers as possible without exposing the reinsurance pool to a loss greater than the $10billion government guarantee. NAIL believes draft legislation falls short for:

• Mixed use strata where commercial use is greater than 20%

• Commercial buildings with a sum insured more than $5million.

Mixed use strata – Why is it an issue?

• Short-term accommodation will be considered commercial use. This in essence means many short-term accommodation buildings under a strata title in tourism hotspots will fall through the cracks. Tourism is fundamental to communities in Northern Australia and must be covered by the reinsurance pool. We know there are strata buildings who are paying as much as twenty times more for insurance for the same building in other parts of Australia, including many buildings on Hamilton Island that will miss out due to short term accommodation use.

• The 20% commercial use limit is very limiting to many buildings and unfairly penalises those who reside in mixed-use strata as their primary residence.

• While the legislation seeks to provide cover for commercial buildings with a sum insured under $5million, strata buildings under $5million are not afforded the same access to the reinsurance pool. This means a small strip of shops under a strata title that has a sum insured of say $2million that houses small businesses will not be afforded cover.

Co-Chair Margaret Shaw commented “I started this fight 10 years ago on behalf of Seastar Apartments, Airlie Beach. It was my home for 15 years. 10 years later we have a ‘solution’ which will have no affect on Seastar because it isn’t 80% residential. The reinsurance pool is already a failure in my eyes and a waste of 10 years of my life. It will have no effect on almost all Hamilton Island, most of the Whitsundays, a lot of Cairns, or Townsville or Mackay. What are they thinking?”.

Commercial Buildings – Why is this an issue?

• Aged care (and other care) facilities are considered commercial despite the fact they are the primary residence for the elderly people and those with other care needs who reside in them. By excluding aged care and other care facilities with a sum insured over $5million you increase the cost of care for those who reside and use those buildings for residential purposes.

• Hotels, Motels, Short-term accommodation, Boarding houses with a sum insured over $5million: Tourism plays an important part of certain economies in Northern Australia. The reinsurance pool must support accommodation operators and the tourism industry in Northern Australia.

• No context has been provided as to why a $5million limit for commercial buildings has been chosen by the government. NAIL believes this sum insured is too low and will not cover enough consumers.

The Actual Savings

Representatives from Treasury outlined the key mechanisms for savings in the draft legislation:

1. Reinsurance would be offered with no profit margin, that is taken when insurers reinsure in the private sector; and

2. The $10billion government guarantee.

NAIL has serious concerns about what the actual saving will be for consumers in Northern Australia. Profit margins for the reinsurance sector would be no more than 10%-15% and it is debatable how much the government guarantee would actually impact the cost of reinsurance.

A saving of less than 20% will have very little impact for consumers paying twenty times more for insurance in North Australia. It will fall well short of the 50% saving announced by the Prime Minister when the reinsurance pool was first announced and is far from “parity” that other MP’s have been seeking.

Review Period

The legislation proposes a review will take place three years after the legislation is passed. It was advised at roundtable meetings that this review date was chosen because the latest date insurers must prescribe to the reinsurance pool was December 2024.

A three-year wait may be too long for some consumers if the legislation is not fit for purpose. An earlier review period is required to ensure that the reinsurance pool meets the needs for consumers even if the review is limited only to eligibility and savings mechanisms.

What is good about the legislation?

The legislation broadly covers insurance for those using their home for residential purposes (other than those under a mixed-use strata). It means homeowners will be covered by the reinsurance pool.

The reinsurance pool will cover all losses above the policy excess for the first three years with consideration for risk sharing with insurers in the years thereafter. This means the maximum savings will be passed on to consumers faster.

Getting legislation right

While NAIL believes current draft legislation falls short of meeting the needs of consumers – fortunately only a handful of changes would need to be made for NAIL to support the legislation.

We believe the following changes would help to ensure legislation meets the needs of consumers:

• Buildings primarily used for accommodation purposes (including those in strata) should not be considered “commercial use” including but not limited to:

1. Short Term accommodation

2. Hotels

3. Motels

4. Boarding houses

5. Aged and other residential care facilities

• Commercial and mixed-use strata buildings should have the same eligibility criteria as other commercial buildings (i.e. currently a limit for $5million).

• The sum insured limit for commercial use buildings should be higher than $5mllion (ideally $20million, but failing that $10 million).

• The reinsurance pool should cover mixed-use strata buildings where residential use exceeds 50% (up from 20%);

• More savings mechanisms are required to ensure the most in need consumers are at worst saving 50% or at best close to parity with consumers in other parts of Australia. This may include a nominal reinsurance charge to eligible policies that have low/no cyclone risk.

• A review after twelve months limited in scope to consider eligibility and the actual savings.

If you are impacted by this legislation, we urge you to make a submission to Treasury before 17th December 2021 by emailing reinsurancepool@treasury.gov.au.

Further information about Northern Australia Insurance Lobby can be found on our website https://www.nail.org.au/ For more information about this media release, contact Tyrone Shandiman at info@nail.org.au.

Reinsurance Pool Design - Challenges

As the Treasury-led Taskforce for the Federal Government backed Cyclone and Cyclone-related Flood Reinsurance Pool consultations kick into full gear, The Northern Australia Insurance Lobby (“NAIL”) believes several challenges are being brought to light in the design of the reinsurance pool.

While NAIL believes a reinsurance pool is a step in the right direction to resolving the issue of affordability and availability of insurance – the design of the reinsurance pool is critical for ensuring that the solution proposed by government is fit for purpose for policy holders in Northern Australia. Failure in design will mean that many policy holders will continue to have the same issues and problems that have been brought to the governments attention over many years.

Top design issues requiring Federal Government to address:

1. Strata Accommodation Module

Current discussions in Treasury Round Tables include consideration as to whether Strata Buildings which form part of an accommodation module including those under a company title and those under the corporations act (such as Hamilton Island) are to be included as part of the scheme.

NAIL believes it is imperative that the design of the reinsurance pool must include other Module buildings for the following reasons:

• Northern Australia relies heavily on tourism;

• Accommodation module buildings (particularly in Whitsunday region & on islands) have some of the heaviest increases in premiums – in some instances they are paying 20 times the premium of buildings in other parts of Australia.

• Investors in accommodation module buildings are often Mum & Dad investors and not big corporations with deep pockets.

We spoke to Jeff Aquilina Managing Director of At Hotel Group who are the largest accommodation provider in Airlie Beach representing seven accommodation module buildings. “Considering management rights account for more than half of the accommodation sector in Queensland, it would have a significant impact on tourism if investors abandon the market due to the cost of escalating insurance. What we are finding is current lot owners in Accommodation Module buildings are seeing diminished returns on investment due to increased outgoings, driven by insurance, and many apartments that are normally used for short term accommodation are being purchased by owner occupiers.”

“The cost of insurance is making the outgoings impossible and unaffordable and is in turn having a significant impact on property values, impacting many mum and dad investors that make up 90-95% of our investors. At a complex we manage, over a seven year period the premium increased by 250% and we are told by sources in strata insurance that the premium is 7-8 times more than the cost of insurance in other parts of Australia. If Accommodation Module buildings under a strata title building are not included in the government backed reinsurance, holiday letting will become unviable for northern Australia – this will significantly affect the tourism industry.” Mr Aquilina Said.

2. Small business

Proposals put forward by the Treasury-led Taskforce suggests the reinsurance pool will limit cover to small businesses. Various stakeholders at Treasury Round Tables have put forward their concerns that this proposal can create a two-speed economy between small and large business. The concerns include:

• Inequities can arise when a small business leases their premises from a landlord who is not considered a “small business”. If the insurance for the landlord does not fall under the reinsurance pool it can mean the cost of insurance is passed on to the tenant (i.e. small business) through higher outgoings or rent. Compare this to a small business that owns and occupies their premises and has access to the reinsurance pool which means the insurance cost associated with the building is lower.

• The scope as being “small” business it would be a disincentive for a business to expand past a certain point in the future because it’s insurance would suddenly skyrocket.

• When it came to mixed strata, this can include small and big businesses mixed with residential or accommodation strata and in this case splitting up what was covered by the pool and what was not would be extremely complicated.

“The high costs and inability to access insurance is prohibitive for those looking to invest in North Queensland which is stifling our region’s ability to grow and prosper. We have reached the point of ‘Market Failure’ whereby there is no sufficient and/or affordable insurance in Northern Australia. Access to insurance is imperative for Townsville and North Queensland to reach its full economic potential and essential to building resilient communities.” Townsville Enterprise CEO, Claudia Brumme said.

“The $10 billion reinsurance pool was a significant announcement with the potential to be a real solution to a decade long problem of rising and unaffordable insurance. However, it should not be defined for the purposes of eligibility - the scheme should cover all located within the areas designated for eligibility to the reinsurance pool. If the scheme is limited in its beneficiaries, it changes very little for our region that has kept the national economy out of recession. We are contributing $20bn to the national GDP and not having access to affordable insurance in all aspects of life is unacceptable and will hold back the entire prosperity of our country.”

3. Marine Insurance

Current discussions have focused on static property being covered by the reinsurance pool but affordability and availability of marine insurance in Northern Australia is also being brought to the forefront in round-table discussions.

NAIL believes it is imperative the reinsurance pool considers Marine Insurance in its scope.

We spoke to Sharon McNally Director of Cumberland Charter Yachts and QLD Council Member of Boating Industry Association (BIA) on the issue of Marine Insurance.

“Since Cyclone Debbie (2017) we have seen insurance premium increases of 40%-50%. In recent years, I have spoken to several different brokers for quotes each year and we are finding there are less and less insurers willing to cover us, last year 13 were contacted, all but one turned us down. Currently there is only one viable insurer that offers charter boat insurance in North Queensland and, if they stop providing insurance or continue to increase premium, it may no longer be viable for many marine businesses in North Queensland to continue operating.”

“If affordability and availability of insurance for the marine industry is not addressed as part of the Federal Government Reinsurance Pool many marine businesses will simply take their boats to other parts of Australia. Marine tourism is a vital part of the region’s economies in Northern Australia including the Whitsunday’s where Cumberland Charter Yachts is based. People travel the world for bareboating experiences and if there are no bareboat operators (like my business), those tourists will find other holiday destinations, like Fiji, Tahiti and the Med.”

The flow on effect of a contraction in marine business in Northern Australia is significant for towns dependant on the marine industry. The Federal Government needs to consider not only marine businesses but the many businesses that service the marine industry and rely on the marine industry to remain in Northern Australia.

4. The Actual Saving

The actual saving generated by the re-insurance pool will be another test for the success.

A building paying 20 times the cost of insurance in Northern Australia will not see a material benefit if the premium saving is only 10%.

NAIL believes if the actual cost saving isn’t on average 40%-60% for the most impacted policy holders the reinsurance pool will not meet the needs of the policy holders..

“In North Australia strata insurance in particular is out of control, with complexes now being legally underinsured against legislation and more cases being referred to the BCCM Commissioner every day. We have market failure and it has to be properly addressed, I’m hoping this Cyclone Reinsurance Pool, designed properly, will help do that for home and contents and strata. Even now up to 50% of some areas areas are without insurance or underinsured and we’re coming into yet another cyclone season. ” long time consumer advocate and NAIL Co-Chair Margaret Shaw said.

NAIL believes getting the design of the reinsurance pool right is imperative to addressing the issue of affordability & availability of insurance in Northern Australia. We will be contacting our local members of parliament in coming days to discuss our four major concerns in more detail.

For more information about this media release, please contact info@nail.org.au

Reinsurance Pool Consultation Paper

Submissions for the Treasury reinsurance pool consultation paper closed on 18th June 2021. Northern Australia Insurance Lobby Inc (“NAIL”) has outlined the following key objectives it believes Treasury should focus on to effectively design the reinsurance pool:

• Consumers in northern Australia should pay no more for their insurance per dollar value insured compared to policy holders in other parts of Australia with similar natural disaster risk, such as bushfires, storm or hail

• The reinsurance cost payable by consumers should not attract state government stamp duty, GST or commissions – for example this may be done by charging the reinsurance cost as a levy and not as part of the premium

• The eligibility criteria for the reinsurance pool should extend to as many policy holders as possible

• Design and pricing should be easy for the Australian Reinsurance Pool Corporation (ARPC) and insurers to implement, and easy for consumers to understand how they can continue to reduce their premiums

The consultation process has brought up some difficult issues Treasury will have to deal with in the design of the reinsurance pool, for example, who might receive the greatest benefit from the reinsurance pool and how small business is defined.

In addition to our key priorities, NAIL believes the below items should be tabled for discussion:

• A portion of reinsurance premiums collected should fund mitigation measures

• Risk assessment should be done on any type of property at the request of the owner, with proper dispute resolution process

• The reinsurance pool should be expanded to cover a broader range of events or all catastrophe events in the future

To view NAIL’s full submission to the Treasury-led Taskforce follow the below link:

NAIL Reinsurance Pool Response

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Download PDF • 686KB

For more information about this media release, contact Tyrone Shandiman on 07 3899 5129 or Margaret Shaw OAM via email info@nail.org.au.