How does it work?
SCA (Qld) members have recently heard a lot about the Northern Australia Reinsurance Pool however it is perhaps not well understood just how this will work to benefit the strata industry. To explain, we have prepared the facts below so you can communicate with committees and staff about how this exciting program will work.
What is the Northern Australia Reinsurance Pool?
To start with, it is important to distinguish “reinsurance” from insurance. At its most basic level reinsurance is the practice whereby insurers shift part of the risk within portfolios to other parties by some form of agreement. This is done to reduce the likelihood of a large and potentially crippling payout if a large-scale insurance claim is made. For simplicity, you might call it insurance on insurance claims for an insurer.
All strata buildings with more than 50 per cent residential floor space will be eligible for an unlimited amount of coverage. Strata buildings with less than 50 per cent residential floor space will be eligible up to a maximum sum insured of $5 million. It is important to note that Treasury Guidance has determined that apartments used for short-term letting and Air BnB will be considered commercial for the purposes of the Pool. So if the bulk of a scheme is used for short term letting, it will be classed as commercial in the eyes of the Pool.
The legislation which will enable the creation of the Northern Australia Reinsurance Pool as it is known is as the TREASURY LAWS AMENDMENT (CYCLONE AND FLOOD DAMAGE REINSURANCE POOL) BILL 2022. Although quite technical, this particular Bill actually amends a reinsurance pool currently operated by the Australian Reinsurance Pool Corporation (“ARPC”) (a Commonwealth owned entity) to reinsure for terrorism risk. The pool, in addition to this terrorism risk insurance, will now cover all eligible claims above the policyholder’s excess for cyclone events for the first three years. After this transitional period it will move to a risk sharing arrangement to be determined by the Minister. In turn, the pool is funded by premiums insurers are obliged to pay- participation in the pool will be mandatory. If the premiums paid by insurers are insufficient to fund claims on a particular disaster event a $10 Billion Commonwealth Government guarantee is activated- the sum of this guarantee can be adjusted annually at the discretion of the Minister.
Insurers are expected to enter into reinsurance agreements with the ARPC that take effect from 1 July 2022. Large insurers have until 31 December 2023 to join the scheme, at which point they must have obtained reinsurance for all their eligible cyclone risks with the ARPC. Small insurers must reinsure all their eligible cyclone risks with the ARPC by 31 December 2024.
The Reinsurance Pool under this Bill will cover damage caused by a cyclone that commences during a declared cyclone event, including any damage due to wind, rain, rainwater and rainwater run-off, storm surge and flooding. The definition of a cyclone will be a tropical cyclone declared by the Bureau of Meteorology.
The Chief Executive Office of the ARPC will be empowered to make a declaration of an event which will allow payouts from the pool to commence. Should the Pool have insufficient funds to payout claims based on premiums paid in, the Commonwealth Government guarantee will be used to fund the balance.
The idea behind the scheme is to encourage insurers to enter the market by giving them some certainty around funding for claims. This will create competition and hopefully bring premiums down substantially. Treasury modelling indicates the most at risk schemes could have reductions in premiums as high as 58 per cent. The goal of the ARPC is to targets the schemes with the most exposure, that are in the medium and high-risk categories. There has been no estimate given on average savings, though figures of 10 and 20 per cent have been floated by some industry bodies and officials within the insurance industry.
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