The recent disastrous floods in northern New South Wales and Queensland, estimated to cost insurers at least A$4.38 billion, have focused attention on the cyclone and related flood damage reinsurance pool for northern Australia that commenced on 1 July 2022.

The pool was actively promoted by former Prime Minister Scott Morrison and is backed by a A$10 billion government guarantee.

The mechanism of the new reinsurance pool can be accurately compared to Pool Re, a terrorism pool in the United Kingdom, defined in the following way by its administrators: ‘In the event of a loss resulting from an act of terrorism (substitute cyclone and/or flood event in the Australian context), each member must first pay losses up to the threshold that is determined individually for each insurer. If losses exceed that threshold, the insurer can claim on the Pool Re reserves.

‘These reserves have been accumulated by the members of Pool Re since its inception. It is only in the event that the reserves are exhausted that Pool Re would draw upon government support.’ 

Will the pool reduce premiums?

The northern Australia pool is intended to apply to residences and small businesses as an alternative to current insurance arrangements. The former federal government suggested it would reduce premiums by 46 per cent to 58 per cent for private insureds and up to 34 per cent for small to medium-sized enterprises.

However, the new Labor government launched the pool on 1 July confirming the pool would not deliver the savings it had promised. 

Industry critics had already raised doubts about the projected premiums savings for customers. Sure Insurance managing director Bradley Heath told a Senate committee hearing ‘the mandatory participation for the cyclone reinsurance pool could see some policyholders paying more rather than achieving savings’.

Another point of contention was the lack of disclosure around the modelling that will be used to establish the parameters of the pool’s mechanism. Assistant Treasurer Stephen Jones released the modelling at the pool’s launch, saying the former government had misled voters, ABC reported. 

‘The modelling at the moment suggests in high-risk areas you could see an [average of] 19 per cent reduction for homeowners and 15 per cent for strata,’ Mr Jones said.

University of Melbourne post-doctoral research fellow Dr Antonia Settle told the Senate committee, the pool would be a ‘blunt instrument’ expanding ‘the unavailability of insurance’, which has rapidly become a national problem reflected by ‘the beginning of price realignment in real estate as climate change starts to be priced into the market’.

The publication Crikey remarked: ‘A taxpayer-funded reinsurance [pool] simply treats the symptom, not the problem which is climate change.’

Reinsurers express concern

On virtually the same day as the federal government conveyed its support for the cyclone reinsurance pool, major insurer Suncorp advised that it had ‘sufficient reinsurance to cover its expected losses from the recent floods’ but warned that ‘reinsurers are losing interest in Australia because of its escalating risk profile and high costs, which need to be passed on to customers in the form of higher premiums’.

Further, in a recent commentary regarding catastrophic losses in the current hard insurance market, American insurance software company Zywave stated:

‘Floods and similar disasters are increasingly common and devastating. Years of costly disasters like these have compounded losses for insurers, driving up the cost of coverage overall, especially when it comes to property policies.’

On reinsurance, Zywave remarked: ‘Reinsurers have exposures to many of the same flood events and trends that are affecting insurance companies.

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