Concerns by consumers have lead to a Northern Australia Insurance Taskforce interim report regarding the impact of the significant increases in insurance premiums in parts of Northern Australia, particularly in Northern Queensland, due to cyclone risk.

The Taskforce is set to explore the feasibility of two options a mutual cyclone insurer and a cyclone reinsurance pool. The Taskforce has sought to update information on the movement of insurance premiums in Northern Australia and gain a better insight into the diversity of the rise in premiums faced by individuals.

The interim report states that in recent years the insurance industry has reassessed it's understanding of the potential losses due to cyclones in nNorthern Australia stating that losses from recent natural disasters as being a trigger.

While the frequency of cyclones may be understood, the interim report states that there is less available information on how much damage is caused to buildings by cyclones of different strengths. Therefore, insurers have reported that new data for these cyclones caused them to revise up previous estimates of the loss that cyclones could cause.

The global insurance industry provides reinsurance to Australian insurance companies, therefore the 2011 global events were another factor behind the rise in insurance premiums in Northern Australia.  The magnitude of losses led global reinsurers to re-evaluate the risk of natural disasters around the world.

The consequences of this lead reinsurers to increase the price of reinsurance which was then passed on to consumers in higher risk areas in Australia through increased premiums. This repricing then prompted Australian insurers to re-evaluate their own estimates on natural disaster losses in Australia.

The insurance industry claims that they were materially underpricing the risk presented by cyclones in Northern Australia, based on the information now available.  This has reportedly contributed to consumer mistrust in insurance companies.

A recent change reported by insurers is that they have moved toward spreading the cost of reinsurance in line with the risk attributed to each policy.  For areas affected by cyclones, this has meant an increase in premiums because cyclone risk is seen to raise reinsurance costs, thus more of the reinsurance cost is now being allocated to premiums seen by the customer.

On the 12th October, Federal Member for Leichhardt Warren Entsch slammed the insurance industry in Parliament for not being serious about improving the affordability and availability of property insurance in Northern Australia based on the industries submissions to the Taskforce.

“Submissions to the Northern Australia Insurance Taskforce from the insurers and the Insurance Council of Australia (ICA) are overwhelmingly against government action.

“The ICA’s representation on the Taskforce continues to be disruptive rather than constructed and the industry still says there isn’t a problem,” he said.

However, Mr Entsch had concerns that the ICA presented the Taskforce with misleading submissions stating that four insurance companies quoted on properties in postcode 4825.

“They came back with fabulous prices and said there wasn’t a problem.  But 4825 is Mt Isa - I’d like to know the last time there was a cyclone in Mt Isa, said Mr Entsch.

Mr Entch said that all the submissions to the Taskforce from outside the insurance industry recognise the need for intervention and say that the cost of insurance premiums is a real threat to the economic growth of Northern Australia.

The Insurance Council of Australia announced on the 7th October that insurers proposed a practical solution to resolve the Northern Queensland premiums issue announcing that short-term targeted Federal Government subsidies that improve the cyclone resilience of older homes in Northern Queensland will be the most effective, low-cost and sustainable way of protecting communities while also reducing insurance premiums.

It was reported the subsidy proposal has been submitted to the government’s Northern Australia Insurance Premiums Taskforce as a realistic alternative to much more expensive proposals under consideration. 

ICA CEO Rob Whelan said: “Neither the mutual nor reinsurance options being actively examined by the Taskforce will reduce or prevent the property damage that cyclones cause – and that’s the primary contributor to insurance premiums in North Queensland.

The Northern Australia Insurance Taskforce interim report is available online with the final report due to be released by lated November 2015.