Australia plans $10bn government cyclone reinsurance backstop

Australia’s government is planning to introduce a reinsurance pool to cover cyclone and related flood risks, as a way to help the private industry provide more affordable property insurance to those in the path of tropical cyclones in the north of the country.

Prime Minister Scott Morrison’s government announced the plans, saying that from from 1st July 2022 this new reinsurance pool will be backed by a $10 billion government guarantee to help make insurance accessible and affordable.

The plan is to reduce insurance premiums across Northern Australia by over $1.5 billion for households, strata and small businesses over 10 years.

While it’s expected that over 500,000 residential, strata and small business property insurance policies in Northern Australia will be eligible to be covered by the reinsurance pool.

Details of the plan are scarce though and thee government has not explained how the private insurance and reinsurance industry, or capital markets, plays a role or leverages the benefits of the reinsurance pool.

A Treasury-led Taskforce will now work to develop the final design of the reinsurance pool, in consultation with industry thee government said, with details to be finalised following that consultation process.

The Insurance Council of Australia (ICA) said that it welcomes the Federal Government’s plans for the $10 billion reinsurance pool.

The ICA said that its Reinsurance Pool Working Group of insurers will now turn its attention to the design and consultation process, to provide important industry input.

ICA CEO Andrew Hall commented, “This is a significant commitment by the Federal Government in addressing the shared goal of improving the affordability and availability of insurance for homeowners and small businesses living with the threat of cyclone in northern Australia.

“Insurers have worked hard for many years in northern Australia to keep premiums affordable and coverage available, however today’s announcement acknowledges that there are costs driven by some cyclone risks that are significant.
The industry has done considerable work on the key fundamentals of a public reinsurance scheme, and if properly designed and implemented a reinsurance pool can put downward pressure on premium costs.”

That last statement is key, that the proper design and implementation of this reinsurance pool is vital or it to be effective.

Finding the right way to share the burden of the risk between public and private capital is vital, in order to avoid the government guarantee becoming the insurance capital of last-resort.

The government could look to introduce layers to the risk pool, finding where global reinsurance and capital markets or ILS investors might have an appetite to participate and collateralize layers of risk, to reduce the reliance on tax payer funding for the pool.

Retrocession could also be a way to transfer some of that risk off the tax payers balance-sheet and into private reinsurance and capital markets, in order to ensure private capital is being used at the most optimal levels of risk in the pool itself.

Of course, we’d suggest insurance-linked securities (ILS), such as catastrophe bonds, might have a roll to play in the retrocession or risk sharing layers of a tropical cyclone reinsurance pool design for Australia.