Australia’s cyclone reinsurance plans proceed, a future retro opportunity?

Plans are proceeding apace for Australia’s cyclone reinsurance pool, a new government backed facility to enable insurers to access cyclone reinsurance more efficiently.

The plans are proceeding to put in place a reinsurance pool for cyclone and cyclone-related flood, to cover privately-owned homes, strata corporations and small businesses insurance policies. Small business marine property insurance policies are also set to be covered from mid-2023.

Draft legislation has now been published, in a Reinsurance Pool Bill, which details the background and workings of the pool and a consultation period will now ensue.

The new cyclone reinsurance pool is set to be managed and administered by the Australian Reinsurance Pool Corporation (ARPC), the entity that manages Australia’s terrorism reinsurance pool.

While the new cyclone reinsurance pool is set to be underpinned by a $10 billion Government guarantee, it’s interesting that there is no mention in the legislation of retrocession, or whether the future goal could be to leverage private retro reinsurance and perhaps capital market appetite, to reduce the reliance on taxpayer funds.

However, the ARPC is legislated to be able to buy retrocessional reinsurance, something it does regularly, in fact earlier this year the ARPC renewed its retrocessional reinsurance program with $3.475 billion of coverage.

Which means the new cyclone reinsurance pool really could be an opportunity for those seeking to write retrocessional catastrophe risks in Australia, which of course means the capital markets and insurance-linked securities (ILS) sector would likely target a participation in any retroceding of the risk.

The Australian Government said this morning, “The pool will improve the accessibility and affordability of insurance for households and small businesses in cyclone‑prone areas across Australia.

“It is also expected to increase insurer participation in the northern Australian market, increasing competition and putting further downward pressure on premiums.”

Participation in the cyclone reinsurance pool is going to be mandatory and the aim is to reduce insurance costs, while making sure capacity is there to support cyclone exposed regions when disaster strikes.

While Australia has gone down the Government backed route with this, the potential for the cyclone reinsurance pool to look to transfer risks in future, to private or capital market sources, seems high.

In most cases, government backed reinsurance schemes end up buyers of private market retrocession and we’d expect this to happen eventually here as well.

These are potentially significant opportunities for the capital markets to exert their capital efficiencies and lower-cost, particularly if the issuance of instruments such as catastrophe bonds can increasingly be made more cheaper and more simple to sponsor over the coming years.

It may be a long way off, as the cyclone reinsurance pool is only just being formulated.

But, while the Australian Government wants to reduce costs and secure capacity to protect its cyclone exposed regions, doing so solely on taxpayers money, without looking to potentially efficient alternatives, is unlikely to prove viable and we’d expect that at some stage in the future there will be a need to look to the retro market for this.