Australian Reinsurance Pool Corporation (ARPC) launched the cyclone pool in July 2022 to help make property insurance more affordable in cyclone-prone areas by reducing reinsurance costs, a significant cost component of these policies.
Insurers with eligible cyclone pool policies must join the cyclone pool. Large insurers with more than A$300m ($201m) in premiums in home insurance must join by 31 December 2023 and small insurers by 31 December 2024.
Consumer policyholders will continue to choose their own insurer, and insurers will continue to manage all claims. The cyclone pool is designed to drive down costs and help make insurance affordable for Australian communities.
ARPC has welcomed Allianz Australia and the Sure Insurance brand as our first insurer customers of the cyclone pool. We look forward to working with them so they can help cyclone-affected communities’ access more affordable insurance.
So far this cyclone season, ARPC has made four cyclone declarations comprising tropical cyclones Ilsa, Gabrielle, Ellie, and Darian. Some claims have been notified for cyclone Gabrielle which we are managing.
Overview
The cyclone pool is a reinsurance agreement between insurers and ARPC and is a mechanism through which insurers can transfer their risk for cyclones and cyclone-related flood damage. The cyclone pool is backed by an annually reinstated A$10bn Commonwealth guarantee. The cyclone pool operates Australia wide, but targets support to cyclone-prone areas, and provides reinsurance for insurers operating in those areas.
The cyclone pool covers wind, storm surge, and cyclone related flood damage. In northern Australia alone, about 60 per cent of flood risk is due to cyclone-related flooded. (The remaining flood risk is related to other weather events.)
Australia’s competition regulator, the Australian Competition and Consumer Commission (ACCC) is responsible for monitoring the pricing of insurers who join the cyclone pool. Data will be collected by the ACCC to evaluate the impact of the pool and ensure savings are being passed through to policyholders.
Covering cyclone events
Australia’s weather agency, the Bureau of Meteorology will notify ARPC when a cyclone begins and ends, and in some cases re-intensifies. Based on the bureau’s notification, ARPC will declare the start or end of a cyclone event.
The cyclone pool covers claims for cyclone and cyclone-related flood damage arising during a cyclone event, which lasts from the time a cyclone begins until 48 hours after the cyclone ends.
Details on mandatory cyclone pool participation
General insurers with eligible cyclone pool policies must join the cyclone pool.
Eligible policies
- All domestic property wholly or mainly residential (home and contents and landlords) – no sum insured limit.
- Small medium enterprise (SME) – maximum A$5m sum insured limit.
- Strata:
- Residential (50% or greater where occupancy is split with commercial) - no sum insured limit.
- Commercial – A$5m sum insured.
Who must join?
Insurers with gross written premium (GWP) over A$10m (for eligible householders, small business, and strata) must join the cyclone pool (excluding regions ARPC has specified as exempt by notifiable instrument).
Deadlines
Insurers with GWP of A$300m or more (for the householders’ class of direct business as defined in APRA GPS001) must join the cyclone pool before 31 December 2023.
Insurers with GWP of under A$300m (for the householders’ class of direct business as defined in APRA GPS001) have until 31 December 2024 to join the cyclone pool. See Table 1 for more information.
Exemptions
The Terrorism and Cyclone Insurance Act 2003 (TCI Act) and the Terrorism and Cyclone Insurance Regulations 2003 (TCI Regulations) provides an exemption to mandatory joining of the cyclone pool, where an insurer’s cyclone pool eligible premium income is below A$10m in the most recent financial year.
ARPC also determined a list of postcodes where cyclone risk is negligible. The Federal Register of Legislation published the Terrorism and Cyclone Insurance (Areas of Negligible Cyclone Risk) Determination 2023 which is available on ARPC’s website here. The insurer can exclude GWP in these postcodes to determine if eligible premium income is below A$10m.
How do insurers join?
To join the cyclone pool, insurers must sign a reinsurance agreement with ARPC. Under the reinsurance agreement, insurer customers cede all eligible policies for remittance and reporting to ARPC.
Once the reinsurance agreement is signed, insurers will have the option of how their brands and classes of business will be transferred into the cyclone pool, and consideration will be given to the complexity and timing of the transition. The ARPC team will then work closely with insurers to facilitate a smooth transition process.
Prospective cyclone pool insurer customers should read the Cyclone Reinsurance Pool Insurance Company Onboarding Guide, available as a Useful Link in the Cyclone Pool Insurer Onboarding section of the ARPC website. This will aid understanding of legislation governing the cyclone pool, information on pricing and the transition process for policies.
How are premiums calculated?
Insurers are charged reinsurance premiums consistent with expected claims and operating costs of the pool.
The pricing formula is calculated based on property level data such as geography, building characteristics and mitigation. It has been developed in line with the principles that the cyclone pool will:
- be cost-neutral to government over the longer term.
- lower the reinsurance cost for most policies with medium-to-high exposure to cyclone risk.
- have minimal impact on policy premiums for lower cyclone-risk properties and
- maintain incentives for risk reduction and offer discounts for properties that undertake mitigation.
Benefits for insurers
Insurers will benefit from the new pool through the lower costs of reinsurance, and lower capital requirements for this risk exposure.
ARPC is reimbursing claims-handling expenses, and the reinsurance agreement provides funding to support customer service delivery, meaning cost savings for end consumers.
Most insurers have been able to undertake detailed modelling of the savings to customers using the premium engine and data reports.
The cyclone pool will make a real difference to premiums paid by eligible consumers. Around 3.3m households, 220,000 SME businesses and 110,000 residential and commercial strata will benefit from the new cyclone pool. These categories will, on average, realise premium savings of 32% for home and 13% for SMEs, and represent a significant saving for consumers.
The pool aims to make premiums covered by the cyclone pool as low as possible. Our modelling and revised premium rates will support our effort to deliver the best and most affordable outcomes to insurers and consumers.
We look forward to welcoming new insurer customers to the cyclone pool in 2023. A
Dr Christopher Wallace is CEO of ARPC.