Cyclone reinsurance pool lowering premiums in high risk areas but affordability concerns remain

The Australian Government’s cyclone reinsurance pool has lowered insurance premiums for customers facing medium to high risk of cyclone, the ACCC’s fourth insurance monitoring report has found.

However, premiums remain very high for many households and small businesses and are generally rising in most parts of the country. 

Despite the pool commencing in 2022, it has taken time for the impact of the pool to be reflected in premiums. This is the ACCC’s first insurance monitoring report with all eligible insurers participating in the pool. 

“With most customers now experiencing ‘post-pool pricing’, we now have a more complete picture of the pool's potential to achieve its intended outcomes,” ACCC Commissioner Peter Crone said.

“Our analysis shows the pool is lowering premiums of policyholders who live in areas with higher cyclone risk, as it was designed to do. However for many consumers in northern Australia, high cyclone risk may not be the key reason, or the only reason, that their insurance premium is unaffordable.” 

Reductions for some consumers facing higher risk of cyclone

The ACCC’s analysis of average premiums before and after insurers made pricing changes due to the pool shows there have been premium reductions for consumers and small businesses facing the highest risk of cyclone.

“Our analysis suggests premium reductions for those at higher cyclone risk were driven by reduced reinsurance costs brought about, in large part, by the reinsurance pool,” Mr Crone said.

The report found the average home and contents insurance premium (as measured on a per $100,000 sum insured basis) in medium to high cyclone risk areas decreased by 11 per cent compared to premiums before the reinsurance pool took effect.

In contrast, average premiums for low-risk properties and properties at no risk of experiencing a cyclone increased by four per cent and seven per cent respectively.

Premium reductions for home and contents insurance were most prominent in coastal areas of north Western Australia and north Queensland, particularly in Mackay, Cairns, and Townsville (where the median premiums reduced by approximately 15 per cent). The median premium also decreased by nine per cent in Karratha. 

The average small business premium (also measured on a per $100,000 sum insured basis) in medium to high cyclone risk areas decreased by 24 per cent after insurers entered the pool.

The report found the effect of the pool on strata insurance was less pronounced but still material. Overall, it found a seven per cent reduction in the average strata insurance premium (on a per $100,000 sum insured basis) in medium to high cyclone risk regions.

For strata insurance, the ACCC found significant savings for those paying the highest premiums in Townsville (down 28 per cent), Karratha (down 23 per cent), Mackay (down 19 per cent) and Cairns (down 17 per cent).

Australians still facing high and rising premiums

Despite the pool leading to falls for some customers in higher cyclone risk regions, the price of home and strata insurance across Australia is generally high and rising.

The ACCC found that the average home and contents premium in north Queensland and the Northern Territory is now over $3,000 per year, while in north Western Australia the average premium is over $4,600.

Strata premiums remain very high across northern Australia and especially in north Western Australia, where the average premium increased by 18 per cent to be more than $18,000 (per policy). 

Although average premiums remain much higher in northern Australian regions, premiums again rose more sharply in the rest of Australia in 2023-24, up 18 per cent for home and contents insurance.

“Insurers have indicated that a range of factors including building material and labour cost inflation and extreme weather events are contributing to the very high insurance premiums that consumers are facing,” Mr Crone said.

“We have heard about a range of ways that households and small businesses are responding to high premiums, from increasing their excesses to reducing coverage. Many stakeholders were concerned that people were being left underinsured or were dropping insurance altogether.”

Insurance availability relatively unchanged

The initial design of the reinsurance pool was intended to encourage insurers to enter or expand into northern Australian insurance markets by providing a stable and lower cost means to manage their cyclone risk exposure.

However, the ACCC found that there remains limited appetite from insurers to expand services or increase their exposure in certain cyclone prone regions.

There have been some smaller changes involving insurers lifting cyclone-specific embargoes, and changing underwriting controls and exposure limits, however these changes have not been substantial.

No new insurers have entered northern Australian markets following the pool’s commencement.

Insurers could be doing more to incentivise private mitigation

One of the objectives of the reinsurance pool was to incentivise private risk mitigation, to improve insurance affordability and property resilience over time. The ACCC found there are limited signs of this occurring. 

While we found the majority of insurers do have a framework in place to recognise private mitigation, communication by insurers about mitigation is typically quite limited.   

“Improving the resilience of properties and communities to natural hazards through better mitigation is a critical issue if risks are to be reduced and affordability improved, now and into the future,” Mr Crone said.

Background

Reinsurance is taken out by insurers, typically to protect insurers from significant natural peril events impacting their portfolios, such as cyclones.

The Australian Government established the cyclone reinsurance pool in 2022 to help make insurance more affordable for households and some small businesses who are at higher risk of cyclones. The pool is operated by the Australian Reinsurance Pool Corporation (ARPC).

The pool provides reinsurance to insurers in relation to cyclone and cyclone-related flooding risks covered by home, contents, strata and small business insurance (up to a sum insured of $5 million) throughout Australia.

Large insurers were required to join the pool by the end of 2023 and small insurers were required to join by the end of 2024. A list of the insurers that have joined the pool is on the Australian Reinsurance Pool Corporation website.

The ACCC has been directed to monitor prices, costs, and profits of relevant insurance products, before and after the introduction of the pool.

The ACCC is required to provide a report at least once each calendar year during the period 1 January 2022 to 30 June 2026.

The ACCC has brought forward the publication of this fourth monitoring report to allow it to inform the government’s legislated review of the Terrorism and Cyclone Insurance Act 2003, the act establishing the cyclone reinsurance pool, which is due to commence after 1 July 2025.