The Australian government began considering the pool in 2015, as a string of cat events and secondary losses drove homeowner and commercial property premiums sky-high.
Despite initial opposition, insurers agreed in 2019 to investigate the prospects of a public pool and, by 2022, the compulsory vehicle was in place.
But despite popular concerns that cyclone losses were the driver of unaffordable insurance premiums, especially in northern Australia, (re)insurance sources now say that the pool does little to solve the true problem – the worsening impact of secondary perils.
Assessing progress since 2022
The cyclone pool is backed by a A$10bn ($6.6bn) government guarantee and allows Australian insurers to transfer cyclone risk for homes and commercial properties to the pool in a bid to cut down their reinsurance costs and pass on savings to consumers.
The pool focuses mainly on northern Australia where losses have been the most severe and pricing is notoriously high.
Participation in the pool is mandatory for all general insurers with eligible policies. By December this year, all insurers will have joined via a phased implementation process that started with the largest carriers, most of whom signed up in July 2023.
Its effectiveness at bringing down property insurance pricing is to be measured by the Australian Competition and Consumer Commission (ACCC). Although some insurers are yet to join the pool, the watchdog has not indicated any impact on pricing yet.
In a December 2023 report, the ACCC said premiums remained far more expensive in northern Australia over 2022-2023 compared to the rest of the country.
The report found that the average premiums for combined home and contents cover across Australia rose by 15% during the period.
While the country-wide average premium was A$1,779, in the Northern Territory premiums were A$2,992 on average, up 13% over the period.
ACCC commissioner Peter Crone said at the time: “The cyclone reinsurance pool is still in transition.
“The combination of insurers entering the pool at different times, the time required for insurers to fully implement pricing changes, and differing policy renewal cycles mean that consumers may not see the full impact of the pool on their premiums for some time.”
He added that the pool could not protect consumers from price increases relating to inflation.
While it is reasonable to expect little change until the pool is fully implemented, there are concerns within the underwriting community that the scheme will not have its desired effect.
Targeting perils
London reinsurance sources said the pool has done very little to improve the attractiveness of Australian cat business from their perspective.The problem, they said, was that cyclone was the peril that reinsurers were able to price comfortably.
Removing cyclone losses from the equation has essentially left reinsurers of Australian cedants with only the bundle of secondary perils that are harder to model and prone to loss-creep, namely flood and bushfire.
For instance, the 2022 New South Wales flooding event – the most expensive cat event in Australia’s history – cost insurers 64% more than suggested by initial estimates, ultimately racking up A$6.5bn in losses.
Put simply, the government’s response to unaffordable primary insurance was to target the severe, sudden and headline-grabbing peril of cyclones, when the flooding that often follows the initial impact of storms is the more difficult risk to insure and the cause of escalating pricing.
As a result, a number of reinsurer sources have reported little change in the amount of reinsurance bought by their Australian cedants, and no real reduction in pricing on the primary or reinsurance side as losses continue to stack up.
Hours clauses leave insurers high and dry
The cyclone pool provides coverage for damage including flooding for the duration of a cyclone plus the 48 hours after its downgrading below Category 1 strength.
This has already proven problematic, as shown when Tropical Cyclone Jasper struck in December 2023.
Jasper made landfall as a Category 1 cyclone but almost immediately weakened, kicking off the two-day countdown.
The storm was, however, the wettest tropical cyclone in Australian history, continuing to dump vast amounts of rain on land after the 48-hour window had passed.
In its last tally, the Insurance Council of Australia estimated losses from Jasper at A$354mn.
None of the flood damage occurring after that 48-hour period is covered by the cyclone pool, meaning insurers got relatively little relief for these losses via the pool and reinsurers picked up the rest.
Insurers have already begun lobbying for changes to the pool’s mechanism, specifically the lengthening of the 48-hour period to align with to the private sector’s standard of 168 hours.
In its first report by on the cyclone pool, published in March 2023, the Joint Select Committee on Northern Australia cited several Australian insurers’ concerns around the time limit.
Royal Automobile Club of Queensland, for instance, said the 48-hour period forces it to buy additional cyclone reinsurance, while QBE said the limit creates “frictional costs” in determining which losses occurred within the timeframe.
Solutions
Sources agreed that a more useful reinsurance pool for Australian risk would be one for flood or for bushfire.
Several cited the UK’s Flood Re as an example of a pool that works well, in that it tackles the specific risk that was causing price increases, is clearly defined, and brought with it a host of flood mitigation measures to tackle the impact of the peril itself.
The Australian cyclone pool is due for a government review in 2025, at which point all local insurers will have joined and the impact of the pool can be better determined.
It is unclear at this stage, however, that the mechanism will meaningfully lower (re)insurance costs in the country without reform.
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