Thursday, 17 February 2022
Treasury Laws Amendment (Cyclone and Flood Damage Reinsurance Pool) Bill 2022; Second Reading
Labor supports the Treasury Laws Amendment (Cyclone and Flood Damage Reinsurance Pool) Bill 2022. Home and contents, small business and strata insurance has become more expensive and unaffordable in parts of Australia, particularly in areas that are at risk of damage from cyclones and flooding associated with the increasing risk of climate change. That's putting pressure on household budgets and is leading to underinsurance in certain regions within Australia.
There have been several inquiries and reports into the affordability of insurance in the north of Australia. There was the Productivity Commission inquiry into Natural Disaster Funding Arrangements, the Northern Australia Insurance Premiums Taskforce and the Senate's inquiry into Australia's general insurance industry. Most recently the Australian Competition and Consumer Commission Northern Australia Insurance Inquiry was conducted over three years and found that the average premium for combined home and contents insurance across northern Australia was almost double that of the rest of Australia. Between 2007 and 2019, average home insurance premiums rose in real terms by 178 per cent in northern Australia, and combined home and contents rose by 122 per cent. Average contents insurance premiums increased by 33 per cent in northern Australia, but decreased by three per cent in real terms in the rest of Australia.
These increases are due to climate change. Insurers are pricing their premiums based on the risk of damage from cyclones and other severe weather events in the north of Australia. Because some insurers don't want exposure to risk levels, they simply don't operate in the area. In fact, there are only around eight insurers who offer insurance in Australia's north, with that lack of competition adding to price increases. The ACCC recommended a number of measures to improve insurance affordability but pointed out that the cost of insurance reflects the risk of damage due to climate change and that governments must find ways to reduce that risk through better building codes and mitigation infrastructure.
It's important to note that the ACCC did argue against the creation of a reinsurance pool. After three reports over three long years, the Morrison government has ignored that ACCC report and refused to respond to its recommendations. Many of those recommendations would have made a difference to insurance premiums, and it goes to the fact that the government has had nine years and has done very little on this issue. After nine years, they have left it until the dying days of this parliament to try and ram through this legislation. Nonetheless Labor will be supporting the bill.
The bill creates a reinsurance pool which will be administered by the Australian Reinsurance Pool Corporation and will commence on 1 July 2022. Large insurers have until 31 December 2023 to join the scheme, and small insurers have until 31 December 2024. The scheme is compulsory for insurers that offer cyclone risk policies. All eligible cyclone risks are covered under the scheme. However, insurers will need to obtain additional reinsurance from the private market for any of their retained risk. For insurers who participate in the scheme, it's mandatory. Nonparticipation will see a fine of up to 1,000 penalty units. The pool will apply to Australia and its external territories.
Basically, the way the pool will work is that it will be compulsory for insurers to take out their insurance with the Reinsurance Pool Corporation. The Reinsurance Pool Corporation won't charge the typical profit margin that insurers would face in the private sector, thereby making a cost saving on the cost of reinsurance in the north of Australia on cyclone coverage. It's hoped that they will pass that saving on to their customers and, of course, that that will increase competition.
Over the last couple of week, the government has been claiming in the media that this change will produce savings for households on insurance in the magnitude of 46 per cent for home and contents and of 58 per cent for strata developments on their insurance premiums. Labor has simply been asking the government to release the modelling. We know they have done modelling on this issue, and we believe that the people of the north of Australia—households, businesses and consumers—have the right to know what these claims are based upon. When the scheme was originally launched, the minister said it would provide savings of up to 10 per cent. Now the minister is saying it will provide savings of up to 46 and 58 per cent. How was that determined? There is an actuarial study somewhere behind that, and I thank the public deserve to know whether or not those savings will be real and what the veracity of those figures is. We have asked in estimates and we've asked through Senate processes, yet the government is claiming public interest immunity and refusing to release those details. I say to those opposite: just release the details, so the people of northern Australia can have a look at them. They've been through enough when it comes to insurance. The government has waited nine years to do something. Nothing has happened. Insurance premiums have been going through the roof. The people of northern Australia have been suffering. They deserve to know whether or not this scheme's going to work—and, indeed, whether or not it's going to get through the parliament.
The pool will cover claims from damage caused by a cyclone that commences during a declared cyclone event. That will be determined by the Bureau of Meteorology; they will form a view as to when a cyclone starts and ends, and that will be declared publicly. The coverage lasts 48 hours after that declaration is made that the cyclone has ended. Importantly, this means that some damage in the wake of many cyclone events that have occurred in Queensland over the past couple of decades would not have been covered by the pool. For example, most of the damage that occurred during Cyclone Debbie in 2017 happened well after the cyclone had hit, with the subsequent flood damage. That would not be covered by this part of the scheme, and that's going to mean that those insurers are going to have to take out two policies of reinsurance for periods where damage occurs after the 48 hours. It's not ideal, but those are the facts that they will have to work around.
The pool covers policies that provide for loss or damage to eligible properties associated with business interruption, a consequential loss and those prescribed by the regulations. An eligible insurance contract must provide for household, strata, small business or charity and not-for-profit property. Government owned properties, where they are insured as a government entity, are not eligible for coverage. Marine will be included, up to a certain limit that is yet to be determined in the regulations. The scheme covers policies for eligible risks up to a threshold of $5 million, and that threshold does not apply to eligible household property policies.
The scheme will be cost neutral to the government over time, and ARPC will be pricing cyclone and flood damage risk to meet the cost-neutral objective. Before setting these premiums, the ARPC must have regard to several factors to ensure that the reinsurance pool can achieve its objective of lowering insurance premiums for households and small businesses in cyclone prone areas. In addition, the reviewing actuary must review the premiums before they are set. The pool will cover all eligible claims above the policyholders excess for cyclone events in the first three years. Thereafter, the pool will operate on a risk-sharing arrangement with insurers to allow the staged transition to a limited level of risk retention by insurers.
The bill provides for cyclone reinsurance to be backed by an annual reinstated $10 billion Commonwealth guarantee, and the guarantee is supported by a special appropriation. If, unfortunately, we do see cyclones that are of a large magnitude in the first few years that draw on the pool's reserves, it is the government that will have to step in and provide that additional backing for this scheme, if it runs out of funds in those early years. The decision to draw on the Commonwealth guarantee must be made if funds from the reinsurance pool are insufficient to meet those claim costs.
As the bill introduces a new Commonwealth guarantee for the cyclone reinsurance scheme, it also makes amendments to ensure that the Commonwealth guarantee for the cyclone reinsurance scheme is separated from the guarantee of the existing terrorism reinsurance scheme. The minister must also provide a report, as soon as practicable, that reviews both the cyclone and terrorism reinsurance schemes three years after the pool starts. The bill also expands the ARPC's board by adding two additional part-time members. It's hoped that they will have experience in this area of cyclone insurance.
In the long run, if we're serious about making insurance costs affordable and sustainable in areas prone to extreme weather, we need to reduce that risk, and that's something that I think the people of northern Australia are acutely aware of now. The premiums are increasing because the risk associated with extreme weather and climate change is increasing. All of the expert evidence is not only that climate change is going to make the cyclone zone move further south but that the severity of weather events is going to increase. That is why insurers are pricing in that risk. That is the cost of climate change. It is being priced into the risk of damage because of extreme weather. It's been pointed out on several occasions that, if you're going to reduce that risk, you need to invest in mitigation infrastructure. We need to invest in flood levees. We need to invest in resilience for households and businesses in this area, through programs such as the Queensland government's Household Resilience Program, which has been oversubscribed on many occasions and is currently in the market.
New figures have been revealed in estimates, showing that the government hasn't been using the Emergency Response Fund to build that mitigation infrastructure. The government established the fund specifically to do that, but it's been uncovered at estimates that the fund hasn't spent any of its available funding, nor has it completed a single disaster mitigation project, and it's pocketed about $836 million in interest. So, instead of using this fund to build mitigation infrastructure to reduce that risk for the people of northern Australia and ultimately bring their insurance premiums down, the government's established the fund, used it to make money by pocketing the interest and ignored the people of northern Australia. That is unconscionable, and that is why, after nine years, people are still facing large increases in their insurance premiums and are saying, 'Why has the government had nine years and done nothing?' They've done nothing.
If Labor is elected, not only will we ensure that the reinsurance pool is put in place but we will make sure that priority is given to the north of Australia in investing in mitigation infrastructure projects. Labor is putting its money where its mouth is, because we've already announced that we will revamp the government's failed emergency Response Fund and create a new Disaster Ready Fund. It will have up to $200 million per year invested in disaster prevention and resilience to protect the lives and livelihoods of Australians, particularly those in the north of Australia, and hopefully bring down their insurance premiums. We've already allocated some of that funding if we're elected. Five million dollars has been allocated to build a flood levee in Mackay, for which the people of Mackay have been asking this government for many, many years now. The government is all talk. Labor will, if we are elected, deliver when it comes to producing mitigation infrastructure that will reduce the cost of insurance premiums for people in the north of Australia. Not only will they get the reinsurance pool but they'll get the additional important investment in mitigation infrastructure that will help bring down that risk as well. I commend the bill to the House and I move:
That all words after "That" be omitted with a view to substituting the following words: "whilst not declining to give the bill a second reading, the House notes that this Government have had almost nine years to take action on the skyrocketing cost of insurance in northern Australia and have failed to deliver anything to the long-suffering households and small businesses who have seen their premiums on average almost double in that time".
I rise to speak on the Treasury Laws Amendment (Cyclone and Flood Damage Reinsurance Pool) Bill 2022. I have to say, before the member for Kingsford Smith leaves the chamber: this hasn't been a nine-year journey. The first time we had the opportunity of fixing this catastrophe was back when I approached his Treasurer, Wayne Swan, 11 years ago, pleading with him to establish a reinsurance pool. So let's not come here and suggest this is something that has been ignored by this government. It goes way back, 11 years ago, to when we first approached Wayne Swan, as the Treasurer, and he rejected that claim at that time.
At the time the argument was that there was no market failure and that governments could only intervene if there was market failure. Because the insurance companies were vehemently opposed to it the Insurance Council of Australia wanted nothing to do with it, so they refused to cooperate—in spite of the fact that I was getting calls like the one from Mark Cromwell, from the Ferntree Rainforest hotel, located in Cape Tribulation. In 2018 it was $10,000 for their insurance. In 2019 it was $100,000 for their insurance. In 2021 it was $200,000 for their insurance. When you've got 27 staff, there is no point in trading anymore with the risk versus profit. I got a call from Christine Walker, from North Shore Towers. Their premium was $350,000 this year, with a $200,000 excess for named cyclones.
The good thing about this, of course, is that these people were still able to get insurance. I have to pay tribute to one of them—Margaret Shaw, who provided information to me. She said that insurance is being charged at horrendous rates. Prior to the GFC $800 to $900 per unit per year was the norm. It has gone to $4,000 to $5,000 per unit, which is not uncommon, and $5,000 to $6,000 is not unusual. For two complexes, one in Townsville and the other in Mackay, it has gone to $7,000 to $8,000 per unit. One complex in Airlie Beach is currently paying $11,000 per year per unit, and another one on Hamilton Island is reportedly paying $38,000 per unit per year for insurance alone. This is where they started to get the problems coming in. It was after that that we started to see an absolute failure in strata insurance.
So don't come in here with this nonsense that this was a coalition problem; the coalition has actually solved this problem. I see Minister Sukkar here; thank you very much indeed. I would also like to thank the Prime Minister and the Treasurer for the outstanding job they have done and for listening. I'd also like to acknowledge my colleagues. We have the member for Herbert here. The member for Dawson was another one I worked with very closely on this.
I have some reports here. The Pivot north report, from 2014, recommended that we move on insurance in northern Australia because it was looking like the market was going to fail. The Unleashing our tourism potential report, from 2018, called on government to deal with the problem. So this is not a new problem, but this is a problem we needed to have. I was desperate, over the 11 years of this journey I have been on, to make this happen.
This is a new thing that we are doing now for Australia. I appreciate what we've done. I appreciate the fact we've extended it to marine assets as well, which will come in 12 months later. While there is a review in three years time, I really appreciated the minister's commitment to do a review in 12 months. That is absolutely critical, because that will see whether or not it is working and whether we need to make adjustments on who needs it one way or another. I thank the minister for his commitment to do that. At this stage there are commitments there for very significant savings. We've got to make sure that these companies come back into the market. Up until recently, a lot of people could get no access to insurance at all. Another thing in this legislation is that for the first time ever insurance cover is being offered to the Indian Ocean territories. Cocos and Christmas islands have had no cover ever. This gives them cover for the first time. They are part of northern Australia and they should be treated as such.
I've been asked to keep this quite brief, and I'm happy to do so, but this is something that has been an 11-year journey for myself. There's been a lot of pain over those years. This is a commonsense solution. I'm not going to guarantee that everything will work 100 per cent as this rolls out, but I can tell you that despite criticism from the other side there has been no contribution whatsoever to solving this. I welcome the fact that we have bipartisan support on it now. Let's stop throwing barbs. Let's start working together and making sure we get the best possible outcome for this so that we can roll this out. Maybe we'll see something here that can go out to other communities as well. I commend the bill to the House.
I rise to support the amendment moved by the member for Kingsford Smith to the Treasury Laws Amendment (Cyclone and Flood Damage Reinsurance Pool) Bill 2022. We recognise that there have been significant rises in the cost of insurance for homes and small businesses, particularly in northern Australia, but what I want to draw the attention of the House to is the very thing that my colleague just mentioned, and that is that hopefully this is just the start of tackling insurance problems for places outside northern Australia.
The Hawkesbury and Blue Mountains residents are facing extraordinary increases in insurance costs, to a point that many cannot afford it, because of the increasing frequency and severity of fires and floods. I want to talk about this sort of scheme, if it's implemented effectively, if it proves to achieve the objectives that are held with it, and I have to say that I don't think it is the only step that needs to be taken to help people manage insurance. We focus a lot on the cleaning up after a disaster but not as much on the planning and preparation for it.
In terms of floods, many insurers in the country do not insure people in the Hawkesbury. They're sitting on the Hawkesbury River on one of the plains most likely to flood. It always has flooded and always will flood. Either insurers don't offer insurance or, if they do, they price it so that people simply cannot afford it. During the floods last year I spoke to a lot of people about this, and some had seen the payments jump from $3,000 a year to $30,000 a year for a typical suburban home. That's a tenfold increase in insurance. When that happens, people have to make a choice. When they bought these houses they could afford insurance, but as the years and decades have gone on those prices have gone up, and they are being priced out of the market. I'd heard people say, 'Why do they live there if they can't buy insurance?' Well, they could buy insurance when they moved there. For many people that is the case.
The historical homes on the Hawkesbury, which were built in the 1800s, have survived many floods. The stone buildings can be hosed down, but the internals do have to be replaced. Residents have asked me why they can't have flood insurance that doesn't cover the replacement of the entire house, because they're confident their house is going to stand. What they do want to see is something that they can afford which will help cover the cost of the internals. It might be $50,000 or it might be $70,000, but for that they can get a new kitchen put in, they can replace the flooded gyprock, they can get the carpets done—all the things that they couldn't remove when the flood was coming. A small insurance package would give them the opportunity to do that.
As it stands, people have had to save up and use their savings or extend mortgages on homes to do it. It's been an expensive business. What they are doing, though, is making themselves more resilient, and they could do with help to achieve that. They're putting kitchens on wheels so that they can wheel them out. They're doing light fittings that are easily removed. They're not using timber or gyprock on the walls; they're using modular blocks with render or other alternatives that are a lot easier to hose out as the floodwaters recede.
What we need on top of talking about reinsurance is a place where people can go to find out how to do this. We need to empower people to be more resilient to these floods, and that also applies to fires and to storms, including cyclones. It applies to any of the natural disasters that our communities across the country face—greater access to information for people who want to retrofit their home for flood or bushfire, and greater access to information for people who are constructing.
The residents of homes that are more modern are feeling pressure. They're concerned that no-one tells them that they're not going to be able to get insurance when they're buying a house. Funnily enough, some real-estate agents just neglect to mention that bit. It's not until people are talking to mortgage lenders that they start to see some of the complication, and even then it often isn't apparent to people until it's too late. Not being able to get flood insurance of any type understandably makes people worry about the resale value of their homes, and they do deserve some sense of hope. This parliament should be working not just for northern Australia but for those living in the flood plains of the Hawkesbury and across the country.
More than anything, it needs to be a government-led conversation with the insurers about this. My community is very keen to have that. We have started discussions with the Insurance Council about what it could look like and how it could work, using our region as a model. Where will those discussions get? I can't predict, but what I do know is that people want to live in the Hawkesbury. People have lived there for thousands of years, and settlement has been there since the 1800s. People know that there needs to be a way to help them to help themselves to be more resilient. I'll continue to work with my community to do this. I live in one of the most disaster-prone places in the country. Floods, fires, storms—we get all three with regular monotony, and it always does damage.
In terms of the fire issues, I don't know if reinsurance is going to be the answer there, but I think that's another aspect we absolutely have to look at. In the Blue Mountains, people have been through a number of fires in the last few years, including the huge fires in 2013, when my house burnt down and 200 of us in a room were told, 'You are pretty much all underinsured to rebuild your homes to the new standards.' The insurers knew a couple of days after the fires that we were underinsured. We didn't know it until we were told and people started talking to builders about the cost of rebuilding to the new bushfire standards.
So it isn't enough just to say northern Australia needs a reinsurance pool, although we'll be supporting that. What we need to see is a much more continent-wide approach to this. Every single bushfire community is going to find itself underinsured to rebuild homes because of the standards that have come in following the Canberra bushfires. Homes cost hundreds of thousands of dollars more depending on your bushfire attack level rating. This is not something you can change. But what happens is that, even though you build a more resilient home, the insurers don't recognise that you've built in resilience, and they just charge you based on the cost of your home. So people are not getting recognised for the work that they're doing, whether it's putting in sprinkler systems, putting in shutters or, in my case, having a roof which looks like anybody else's corrugated roof but actually has six or seven layers to reduce the chance of any embers getting inside.
These are the things on which, as a parliament, we need to have a conversation with insurers so that the investment people are making to protect themselves better is reflected in the insurance that they pay. That's the only way that communities like mine in the Blue Mountains and the Hawkesbury, in bushfire areas, are going to be able to afford insurance. If they can't, it's this place that will be asked to solve the problem. So let's get on the front foot. Don't wait until we have another 10 bushfires where people are underinsured. Let's take steps to make sure that we are ahead of this and working with communities but, more importantly, working with insurers so that we can help our communities to help themselves.