THE cost disparity between insurance premiums in northern Australia comparative to the rest of the nation has caused considerable debate in recent years.
Much of the debate is due to the haziness of the reasoning that insurance companies provide for the high northern cost.
Australian Government Actuary (AGA) reports show that for a range of insurers, premium rates on home and contents insurance in northern Queensland rose by between 10 and 25 per cent per year from 2009-10 to 2012-13 (see Figure 1).
As a result, the average premium rate in northern Queensland in 2012-13 was about 1.5 times the average in Brisbane and 2.3 times the average across Sydney and Melbourne.
For strata insurance, the AGA’s reports show that the increase in premiums in northern Queensland ranged from around 15 per cent to 65 per cent over the period 2009-10 to 2012-13 (see Figure 2).
On average, strata premium rates in northern Queensland were around five times those in the east-coast cities of Brisbane, Sydney, Melbourne and Adelaide.
Member for Hinchinbrook Andrew Cripps MP said the significant increases in insurance premiums in northern Queensland are causing hardship for residents of these regions, including communities in the Hinchinbrook electorate.
“The unrealistic increases in premiums are resulting in people failing to insure their assets, or underinsuring them, which leaves them exposed and increases the risk of them suffering serious losses in the event of a natural disaster,” Mr Cripps said.
“Strata title properties and rural property insurance seem to have been worst hit in general, but all policy holders have been impacted,” he said.
He said the high cost of insurance is also a barrier to economic growth, new development opportunities and business investing in North and Far North Queensland.
“High insurance premiums are simply an additional fixed overhead cost for businesses in these regions, which prevents existing businesses from expanding and new businesses from starting up.
“There is no doubt that the significant increases in premiums are costing us jobs.”
Mr Cripps said he has never had much faith in the systems used by insurance companies to assess the real risk on an individual property basis to calculate premiums.
He said they are recovering costs from cyclone and flood events in North and Far North Queensland that have occurred over the last decade.
“I don’t think that’s fair, because it doesn’t reflect the real risk of a natural disaster happening in the coming insurance period.”
Earlier this year the Northern Australia Insurance Premiums Taskforce was created to explore ways in which insurance premiums in the north can be reduced.
The taskforce headed by Mr Mike Callaghan AM is primarily exploring the practicality of two options: a mutual cyclone insurer or a cyclone reinsurance pool.
The broad concept of the cyclone mutual insurance option would entail the creation of a new insurance entity that would be ‘owned’ by the people of northern Australia and offer a retail consumer contract to cover loss caused by cyclones.
The objective would be for these cyclone insurance policies to be offered at premiums below the cost of existing insurance policies. The premium income collected by the mutual entity would be used to build a pool that could be used to pay claims.
Supporters of the mutual option have suggested that a government guarantee would likely be required to assist with the establishment of the new entity.
The alternate option of a reinsurance pool for cyclone risk would operate by providing cover to insurers for losses due to cyclones. The goal of the scheme would be to lower the cost of reinsurance which would provide scope for insurers to reduce consumer premiums.
The broad outline of the scheme is that a government-supported entity would offer reinsurance to all insurers covering loss caused by tropical cyclones.
Advocates of this scheme argue that, relative to the mutual option, a reinsurance pool can achieve a reduction in consumer premiums with less impact on the insurance market in northern Australia. This is because all insurers would have the same opportunity to take advantage of the scheme and as such it would be competitively neutral.
“A particular focus has been consultations with consumers and consumer groups, recognising that the rise in premiums has caused significant concerns for many consumers and the circumstances individuals face can differ significantly,” Mr Callaghan said.
The options the Taskforce is specifically evaluating to lower premiums involve carving out ‘cyclone risk’ from existing arrangements.
“The risk of cyclones is attributed as the main factor as to why insurance premiums in northern Australia are significantly higher than those in the rest of Australia.
“However, existing insurance and reinsurance arrangements do not have a separate, defined category of ‘cyclone risk’ nor is there a ‘cyclone policy’ that consumers can purchase.”
Mr Callaghan said it’s important to clearly define what risks may potentially be shifted from insurance and reinsurance companies to the Commonwealth balance sheet.
“For example, uncertainty on this issue could result in significant confusion for consumers and they may end up not being insured for certain risks.
“Similarly, a lack of clarity over coverage of ‘cyclone risk’ can cause uncertainty for insurance companies with their reinsurance arrangements, which may reduce the benefits of any reduction in premiums.”
During consultations, many consumers and business groups in northern Australia indicated that they did not understand or were unconvinced by the reasons given for the rapid increase in their premiums.
The extent of competition in the insurance market will be an important factor in determining the feasibility of options to lower consumer premiums in northern Australia. Some previous reports on the cost and availability of insurance in northern Australia cited concerns that a lack of competition may be a reason for premium increases.
There are factors that may limit active competition in the northern regions. Some insurance companies place a limit on the number of policies that they will write in each northern market in order to limit their concentration risk, which influences their capital requirements and the cost of reinsurance. Once an insurer reaches its concentration limit in the region, it may increase its price to cover the additional costs or refuse to provide a quote for a new policy.
The Taskforce is inviting feedback on the range of issues raised in the interim report with responses due by 14 September 2015.
The final report is expected to be completed by November 2015.
