Coalition open to government underwriting cyclone insurance

Warren Entsch has said Malcolm Turnbull is considering a new model for government-underwritten cyclone insurance in north Queensland in the wake of Cyclone Debbie.

The north Queensland government MP said Turnbull lent a very sympathetic ear to the new proposal for a government mutual and he understood assistant treasurer Kelly O’Dwyer would take the idea to cabinet.

“If we do this, it makes a lot of sense,” Entsch told Guardian Australia.

“Cyclone Debbie reinforces the need for something like this to happen. It is not government-funded but they would need to underwrite it to build it up.”

The proposal would see a government mutual fund providing residents in north Queensland with compulsory basic cyclone insurance which could combine with private insurance for other events such as floods and bushfires.

Entsch said in a mutual model, unpaid funds would not be taken as profits and paid to shareholders or senior executive bonuses, but could be reinvested to bring premiums down further.

Entsch said the model had been refined following his work with a major reinsurer, Willis Re, as well as Regis Mutual Management to address the market failure in north Queensland where there was a lack of insurance competition.

The Northern Australia Insurance Premiums Taskforce, established under Tony Abbott’s government, recommended against a government mutual when it reported in November 2015.

“The government would assume significant risk in order to achieve any reduction in premiums,” the taskforce report found.

That taskforce received modelling indicating the expected long-term future losses from cyclones in northern Australia could be around $285m per year.

But the taskforce found the government would face significant costs by intervening in the insurance market to bring down premiums through a government mutual and it would be difficult to get out of the arrangements once it was involved.

Entsch said the taskforce considered a slightly different model and did not consider it properly due to its membership.

“There were representatives of the insurance industry on that taskforce,” Entsch said.

“I have had a very, very sympathetic ear with Malcolm and I have appreciated Kelly O’Dwyer has agreed to put something up to cabinet.

“[The model] has been refined and I don’t believe it got the appropriate level of consideration [in the taskforce]. The banks don’t want a bar of it.”

Campbell Fuller, general manager communications for the Insurance Council of Australia, said Entsch’s call for a mutual fund was divisive and would have little impact on the price of premiums.

“The ICA urges Malcolm Turnbull and his cabinet to heed the findings of the taskforce,” Fuller said.

“It also would put pressure to fund similar measures in other parts of aus, bushfire floods and other events.”

The Labor chair of a separate Senate inquiry into the general insurance industry, Chris Ketter, accused the Coalition of sitting on its hands regarding skyrocketing premiums in cyclone-ravaged areas.

Ketter said the people of Queensland had been waiting for more than 12 months for a government response to the taskforce report.

“The people of Queensland are no strangers to catastrophe now and yet for more than 12 months, the federal government has let them down by sitting on its hands,” Ketter said.

His comments come after the Senate economics references committee recently heard evidence of the practise of “red lining”, where insurance companies refuse to cover customers in certain areas under any circumstances due to risk.

Ketter’s committee is investigating transparency and competition in the insurance industry and is considering the need for an independent comparison service similar to private health insurance.

Under questioning from Ketter, the Insurance Council of Australia’s (ICA) chief executive officer, Rob Whelan, agreed that red lining does occur.

“It is a pretty rare thing for companies to move away from underwriting certain areas of the country – it does occur,” Whelan said.

The ICA manager of policy, risk and disaster planning, Karl Sullivan, said while red lining was a common term, insurers rarely refuse to cover large areas.

“It might be more accurate to say red dots rather than red lines,” Sullivan told the committee.

“There will be people living next to the river in a cyclone zone who will have very high risks for both of those hazards.

“They could be deemed as having high, very high or even extreme premiums for those risks. But it is rare to see insurers say that they simply will not be operating in an entire area or red lining an area.”

Sullivan said it was more likely that small insurers would not cover an area due to lack of capital and capacity to cover a high volume of claims.

“Where you might see some evidence of that occurring is where the entire area has that risk – an extreme flood risk and an extreme cyclone risk – and then you may find that some insurers, particularly smaller insurers, say, ‘I’ll no longer be operating in that area’,” Sullivan said.

Fuller said the ICA favoured government investment in mitigation and again called on the commonwealth to establish a publicly funded central portal to educate consumers on risks in their communities.

“Investing in mitigation will save significantly greater sums over time by reducing the need to repeatedly rebuild communities after disasters hit,” Fuller said.

He said when mitigation works were carried out, insurers responded to lower premiums.

“The completion of a flood levee around Roma in 2014 resulted in insurance premiums for newly protected residents falling between 70 and 90% in some instances,” Fuller said.