Regulation Impact Statement – Department of the Treasury
On 7 February 2022, the Prime Minister announced the design of a reinsurance pool for cyclone and related flood damage. On 10 February 2022, legislation was introduced into parliament to establish a reinsurance pool by 1 July 2022, which will be backed by a $10 billion Commonwealth guarantee.
The reinsurance pool would seek to improve the accessibility and affordability of insurance for households and small businesses in cyclone-prone areas, which are mainly located in northern Australia. The damage to residential and business property caused by extreme weather events is often severe, and on a scale that leads to the displacement of people from their homes and disruption to business activity. Due to the greater risk of extreme weather events, including cyclones, insurance premiums are significantly more expensive in northern Australia. While there are legitimate reasons for this, including the greater cost to insurers to provide property insurance in northern Australia, this has led to cover becoming less affordable and accessible for consumers and small businesses in the region.
The preferred option was to establish a reinsurance pool with mandatory participation. This would allow insurers to reinsure the risk of losses from claims at a lower cost than in the private reinsurance market. A lower cost of reinsurance paid by insurers would lead to a lower cost that is passed through to the consumer in lower premiums, with monitoring undertaken by the ACCC.
The Department of the Treasury (the Treasury) prepared and certified a Regulation Impact Statement (RIS), which the Office of Best Practice Regulation (OBPR) assessed as good practice.
The RIS estimates the average annual regulatory cost at $0.44 million.
At implementation, the following changes were made which the OBPR advised did not need any further impact analysis:
- consistent with other commercial property insurance, commercial strata will be eligible for coverage subject to the sum insured being less than $5 million;
- to provide greater flexibility for residential and mixed-use strata properties, these properties will be eligible for coverage when at least 50 per cent of floor space is used for residential purposes, instead of 80 per cent; and
- clarifications to define the related damage period; arrangements for Lloyd’s underwriters and unauthorised foreign insurers; and the minimum threshold for insurer participation.
Please note: any accessibility enquiries should be directed to the Treasury.