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:
Reinsurance would be offered with no profit margin, that is taken when insurers reinsure in the private sector; and
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.
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:
Short Term accommodation
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 firstname.lastname@example.org.
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 email@example.com.