Interim Report
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Northern Australia Insurance Premiums Taskforce INTERIM REPORT 2015 © Commonwealth of Australia 2015 ISBN 978-1-925220-64-3 This publication is available for your use under a Creative Commons Attribution 3.0 Australia licence, with the exception of the Commonwealth Coat of Arms, the Treasury logo, photographs, images, signatures and where otherwise stated. The full licence terms are available from http://creativecommons.org/licenses/by/3.0/au/legalcode. Use of Treasury material under a Creative Commons Attribution 3.0 Australia licence requires you to attribute the work (but not in any way that suggests that the Treasury endorses you or your use of the work). Treasury material used ‘as supplied’ Provided you have not modified or transformed Treasury material in any way including, for example, by changing the Treasury text; calculating percentage changes; graphing or charting data; or deriving new statistics from published Treasury statistics — then Treasury prefers the following attribution: Source: The Australian Government the Treasury Derivative material If you have modified or transformed Treasury material, or derived new material from those of the Treasury in any way, then Treasury prefers the following attribution: Based on The Australian Government the Treasury data Use of the Coat of Arms The terms under which the Coat of Arms can be used are set out on the It’s an Honour website (see www.itsanhonour.gov.au). Other uses Enquiries regarding this licence and any other use of this document are welcome at: Manager Media Unit The Treasury Langton Crescent Parkes ACT 2600 Email: [email protected] Page ii CONSULTATION PROCESS Request for feedback and comments Interested parties are invited to comment on the issues raised in this interim report. While submissions may be lodged electronically or by post, electronic lodgement is preferred. For accessibility reasons, please submit responses sent via email in a Word or RTF format. An additional PDF version may also be submitted. All information (including name and address details) contained in submissions will be made available to the public on the Treasury website unless you indicate that you would like all or part of your submission to remain in confidence. Automatically generated confidentiality statements in emails do not suffice for this purpose. Respondents who would like all or part of their submission to remain confidential should provide this information marked as such in a separate attachment. Legal requirements, such as those imposed by the Freedom of Information Act 1982, may affect the confidentiality of your submission. Closing date for submissions: Monday, 14 September 2015 Email: [email protected] Mail: Northern Australia Insurance Premiums Taskforce The Treasury Langton Crescent PARKES ACT 2600 Enquiries: Enquiries can be directed to Stephen Powell. Phone: +61 2 6263 3167 Page iii CONTENTS Consultation process........................................................................................................... iii Request for feedback and comments ..................................................................................................... iii Acronyms and glossary ........................................................................................................ v Overview ............................................................................................................................. 1 Purpose and approach of the Taskforce .................................................................................................. 1 Focus questions ........................................................................................................................................ 4 Part 1: Insurance affordability in Northern Australia ........................................................... 6 Recent premium increases ....................................................................................................................... 6 The causes of the increase in premiums .................................................................................................. 9 Competition in the insurance market in north Australia .......................................................................13 Affordability ............................................................................................................................................15 Underinsurance and noninsurance ........................................................................................................16 Effect on economic activity ....................................................................................................................18 Part 2: The options ............................................................................................................. 19 Common issues ......................................................................................................................................19 Option 1: A mutual insurance company offering cyclone cover to households ................... 26 Description of a potential mutual insurer ..............................................................................................26 Key issues ...............................................................................................................................................27 Option 2: A reinsurance pool for cyclone risk ..................................................................... 33 Description of a potential reinsurance pool ...........................................................................................33 Key issues ...............................................................................................................................................34 Other approaches raised by stakeholders .......................................................................... 39 Taxes and duties .....................................................................................................................................39 Commissions to body corporate managers ...........................................................................................39 Direct subsidy .........................................................................................................................................39 Policy contestability and disclosure .......................................................................................................39 Part 3: Mitigation ............................................................................................................... 41 Role of mitigation ...................................................................................................................................41 Improving incentives for mitigation .......................................................................................................42 Next steps .......................................................................................................................... 47 Appendix A: Terms of reference ......................................................................................... 48 Appendix B: Reference panel members ............................................................................. 49 Appendix C: Organisations consulted ................................................................................. 50 Appendix D: The causes of the rise in premiums ................................................................ 51 Appendix E: Tropical cyclones ............................................................................................ 54 Appendix F: International examples of government‐supported insurance and reinsurance schemes ......................................................................................................... 59 References ......................................................................................................................... 64 Page iv ACRONYMS AND GLOSSARY ABS Australian Bureau of Statistics AGA Australian Government Actuary AGDRP Australian Government Disaster Recovery Payment APRA Australian Prudential Regulation Authority ARPC Australian Reinsurance Pool Corporation BOM Bureau of Meteorology Catastrophe Insurance purchased by insurers on the global market to protect insurers from reinsurance large losses due to a catastrophe. Under the contract the insurer will meet the first portion of claims and claims above this level are refunded by the reinsurer. ICA Insurance Council of Australia NDRRA Natural Disaster Relief and Recovery Arrangements Retention or In the event of a catastrophe causing the insurer to claim on a reinsurance attachment point contract, the retention is the amount that must be paid by the insurer before the reinsurer will refund further amounts. This amount is often called the attachment point of the reinsurance. Retrocession Where a reinsurance company insures another reinsurance company by accepting risk the other company has underwritten. TIO Territory Insurance Office Page v OVERVIEW Purpose and approach of the Taskforce The Taskforce is charged with exploring the feasibility of options that use the Commonwealth balance sheet to reduce home, contents and strata insurance premiums in those regions of northern Australia that are experiencing insurance affordability concerns due to cyclone risk. The background to this task is concern over the impact of the significant increase in insurance premiums in parts of