In this second edition of our Climate Risk Blog we look at the recent ACCC Northern Australia insurance inquiry interim report.
The ACCC Northern Australia inquiry, which relates to home and strata insurance, commenced in July 2017 and is intended to:
- address concerns about insurance availability and affordability
- promote more informed and more competitive insurance markets, and
- make a difference for consumers in northern Australia.
Insurance affordability in Northern Australia has been a controversial issue since Cyclone Yasi and the Brisbane Floods in 2011. Little has changed since then despite five previous inquiries:
The limited outcomes of the previous inquiries suggest that there is no easy fix. Government hesitancy to intervene in the market appears to have outweighed the concerns of residents. Increased mitigation has often been a call out of the past inquiries. We support a much greater mitigation spend but even that will not solve affordability on its own and will take many years.
The inquiry is set to run until November 2020 – which seems rather a long time frame given it has already been underway for 18 months.
What did we learn from the ACCC Northern Australia interim report?
For anyone close to the issues there are few surprises in the interim report.
Insurer pricing is fair: Are premiums paid by North Australian residents subsidising cover for other parts of Australia? The interim report found that despite the significant increase in premiums since 2011, and premiums being 2 to 3 times higher than elsewhere on average, there is no evidence that premiums in northern Australia are too high. In fact insurer profitability was found to be worse in northern Australia than the rest of Australia. The figure below shows profitability over the last 10 years across these two areas.
This chart above was derived from data in table 6.1 of the Northern Australia Insurance Inquiry First Interim Report.
Affordability and availability. The interim report did confirm that affordability is a challenge for some north Australian residents, but availability is mostly adequate with a number of insurers providing cover in most circumstances.
How do the recommendations stack up?
The report included 15 recommendations.
So, 12 of the 15 ACCC Northern Australia recommendations do not specifically relate to the problems in northern Australia. These issues are typically already underway or under consideration or discussion by ASIC and the Royal Commission.
The ACCC has also floated another 13 possible recommendations in the report, many extending those above. Once again these are mostly not specific to Northern Australia.
Focus areas for 2019
Five areas of work have been identified by ACCC for 2019. These include the assessment of measures to improve affordability, which appears to be the substance of the whole inquiry. It seems a shame that 18 months have passed with no apparent progress on this issue.
Being realistic about it there are several broad options to improve affordability, none of which is a new idea:
- Increase mitigation spending. Worthwhile, but cannot fix affordability on its own and is long term.
- Do nothing. Every location has pros and cons as a place of residence. If high exposure to natural disasters and high insurance cost is one of the cons then maybe we just need to accept that.
- Give a direct government subsidy. Stamp duty relief is a start, but 10% is not going to make a big difference.
- Embed a cross-subsidy system. This is like the flood insurance proposal that was put to government in the National Disaster Insurance Review and rejected. Many people think ‘the solution is worse than the problem’. There are examples of cross-subsidy systems in place elsewhere in the world.
- An economic approach to the unique economic impediments. Insure the natural disaster risk separately (through a government or industry-owned pool) so that insurers compete for the remaining risk in the same way as the rest of Australia. The pool would buy reinsurance for the whole region in the same way as the ARPC does for terrorism risk.
It is likely that government reluctance to intervene in the market will continue to limit real funding reform. A larger mitigation spend will help but not solve the issues.
Impacts from Climate Change
The science shows that climate change will exacerbate the risk and hence the funding challenge with fewer but more severe cyclones, a polewards shift in where they occur, increased storm surge from increasing sea levels and both more rain and more intense rain. In our next edition of the blog we will have a go at quantifying the financial impact of these changes to the cyclone experience.
Read our previous blog post: A glimpse into banking climate disclosures