The Australian Reinsurance Pool Corporation (ARPC), responsible for administering the pool, has recently released the first Financial Outlook Report, which is mandatory under the scheme. Feedback from communities and individuals has indicated that the benefits of affordability and availability of insurance are starting to show. More insurers have joined the pool since the release of the report, and the impacts will become clearer in future updates, says ARPC CEO Chris Wallace.
Growing Benefits for Insured Individuals and Communities
"We have already witnessed positive results," says Dr. Wallace in an interview with insuranceNEWS.com.au. "However, it will take some time for the data to reflect the overall benefits of the entire pool."
The report states that as of July 1, nine insurers had already joined the Cyclone Reinsurance Pool, with IAG and Auto & General later becoming participants. The ARPC reveals that premium discounts for household mitigation efforts amounted to $4.9 million by June 30. The scheme aims to expand incentives for mitigation and encourages insurers to collect relevant information.
"Over the next 12 months, we will develop specific strategies for Small and Medium Enterprises (SME) and strata properties," explains Dr. Wallace. "We are collaborating with James Cook University in Townsville to assist us in developing rating factors for the premium formula. This process will take some time, and we will inform insurers in advance."
Positive Outlook for the Pool Despite Past Losses
According to the report, thanks to a relatively calm cyclone season, the pool ended its first year of operation with a net asset position of $43 million. The projected figures for the current fiscal year include earned premium of $737.7 million, an underwriting loss of $4.2 million, and investment income of $1.7 million, resulting in an operating loss of $2.5 million.
During the initial startup phase, the cyclone pool is expected to experience small underwriting losses for the next two years due to a higher expense ratio. However, from fiscal 2025 onwards, investment income is projected to generate a small operating profit.
It's important to note that deviations from the projections are likely due to the volatility of cyclone activity. Currently, the ARPC is closely monitoring Cyclone Jasper after declaring it as the first event of the season.
Stable Premiums and Positive Impact on the Reinsurance Market
Dr. Wallace states that the ARPC is monitoring various financial influences such as inflation. Overall, the report indicates that the cyclone pool is operating as expected during its early stages. "The premiums we have set seem to be performing as anticipated. Unless our modeling undergoes significant changes, we do not expect any material adjustments in the near future," he confirms.
Dr. Wallace also mentions that reports following the mid-year commercial reinsurance renewals indicate that insurers have been purchasing less capacity, with the pool being a contributing factor. This trend is likely a response to the period that included record flooding in eastern Australia. "We have observed evidence that the pool has facilitated the reinsurance market by enabling the deployment of available capacity towards other risks," adds Dr. Wallace.
Large insurers were required to join the cyclone reinsurance pool by the end of this year, while smaller insurers were given an additional 12 months to comply.
Published: Thursday 14th December, 2023
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