Fundamental model failure

by Resolve Editor Kate Tilley

The fundamental insurance model is failing so we need a new way to finance catastrophic risks.

That was the message from former NIBA CEO Dallas Booth, who told a climate change session at WICA2023 that Australian state and territory governments removing stamp duty and other taxes on insurance policies was part of the solution, but “governments won’t because it’s easy revenue”.

Climate change’s ramifications of more frequent and severe weather events called for a greater focus on resilience and a rethink on how we build and where.

Session chair Chris Rodd, who is Australia’s representative on the AIDA Presidential Council and an AIDA Vice President, said climate change was at the forefront of insurance globally. But, with premiums “going through the roof” and the cost of living hitting Australians and the global community, insurance was viewed as a discretionary spend.

Extreme perils

Kylie Macfarlane, Chief Operating Officer at the Insurance Council of Australia (ICA), outlined four factors driving insurance affordability and availability.

• The cost of risk is rising through, among other things, increased litigation and extreme perils. Pricing must be realistic and send a message to high-risk insureds.
• Inflation – the increased costs affect the value chain for post-event rebuilds and recovery. The 2022 floods in southern Queensland and northern NSW were the largest insured event with more than 240,000 claims coupled with workforce inaccessibility.
• Reinsurance costs have risen up to 20%. Australia was once seen as a good market for diversification, but increased perils meant that was no longer the case.
• Government taxes and charges – insurance was doubled taxed with the GST federally and stamp duty from the states. A policy was triple taxed in NSW which had imposed an emergency services levy. In NSW, taxes could add up to 40% on a policy, making underinsurance prevalent.

Mr Booth agreed, saying hidden taxes in NSW generated $1 billion a year. “Never stand between a state treasurer and revenue.”

He said no insurer could levy low-risk clients to ensure the pool was large enough to pay for high-risk clients because the market was competitive and “the next insurer won’t”.

Buyback schemes

Ms Macfarlane said money had to be invested in land planning decisions, resilient infrastructure and building codes. The Federal Government’s disaster fund was a good start but needed to be matched by states and territories.

She applauded buyback schemes in Queensland and northern NSW. “Taking high-risk homes out of stock is a great step forward.” But such schemes needed to be pre-emptive and “help communities get out of harm’s way”.

Ms Macfarlane said governments spent billions of dollars on recovery but had to shift the economic model to invest at the front end to reduce recovery costs. Governments must do the math and compare the cost of recovery with the cost of risk mitigation.

Insane development

Mr Booth said the NSW Government was ignoring a known flood risk in north-west Sydney and allowing “insane” development in flood-prone areas. “Governments control what’s built where and must be responsible to ensure the built environment can cope with Australian weather patterns.”

Michael Pennell, Chief Underwriting Officer at the Australian Reinsurance Pool Corporation, outlined the cyclone pool, which aimed to reduce the unaffordable cost of cyclone insurance in northern Australia. But he said cover was still expensive because not all insurers had yet joined the pool.

The pool was limited to named cyclones and damage that occurred within 48 hours of a cyclone being downgraded because “it’s not a flood pool, it’s a cyclone pool”. The pool was cost neutral, backed by a government guarantee and a “finely tuned” scheme.