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INTRODUCTION INDUSTRY SUPPORT
As the market failure of insurance is a problem
For 138 years the Townsville Chamber of faced by a wider geographical area than just
Commerce has been the independent voice for Townsville, the Townsville Chamber of
the Townsville business community. As an Commerce has spoken to a number of
apolitical, membership-based organisation, the Chambers and Industry Groups to support the
Townsville Chamber is focused on advancing recommendations made in this submission. We
our members’ interests and looking to grow are pleased to advise the following
future opportunities in the North. We work organisations are not only supportive of the
collaboratively with all levels of Government, recommendations but have also added content
other representative bodies, and public and and feedback in relation to the issues faced by
private sector organisations. trying to get affordable insurance in their
regions.
The Townsville Chamber of Commerce
welcomes the opportunity to present the
Commonwealth Government with the following
submission for the 2021-2022 budget.
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Insurance is not a choice. Any Australian that
Insurance: The Market contributes to making this great country a
Failure of an Essential better place must have insurance. The
Australian Government’s stated agenda to
Service in Northern develop Northern Australia cannot be
successful if insurance is not readily available
Australia and affordable in a competitive marketplace.
Insurance is not a product that is available in
the open marketplace for consumer choice, it is
a legislative requirement and financial pre-
OVERVIEW requisite. Insurance is an essential service to
conduct business, to buy a home, or contribute
The ACCC has recently finalised its much-
in a meaningful way to the economy.
awaited Northern Australia Insurance Inquiry
(NAII). The report broadly highlights the issues
known only too well to the residents and
THE PRINCIPLE OF INSURANCE
business owners in Northern Australia.
It is crucial to understand the basic principle of
Unfortunately, the report fails to expressly state
insurance. Insurance is when many people pay
the market failure of the essential service that is
a little amount of money to create a bigger pool
insurance, which will not only impede, but will
of money so that anyone unfortunate enough
ensure Federal Government objectives of
to suffer a loss is reimbursed financially for that
developing Northern Australia remains
loss from the pool.
unachievable without intervention.
The principle of insurance is profitable in
INSURANCE IS AN ESSENTIAL SERVICE Australia. According to the ACCC's NAII over the
12 years to 2018-19, insurers made an
A business or individual cannot operate in a free estimated profit of $8.2 billion from home,
market in Northern Australia without insurance. contents, and strata insurance in the rest of
It is a requirement: Australia at a gross profit margin of 12%. (See
page 108 of the NAII)
by a financier when borrowing money
for an individual or business that Not insuring particular geographical areas or
provides goods or services at the specific events means more profit, at less cost,
legislated Australian Standards which is good for the insurance industry but
when renting a premise supportive of a practice that is contrary to the
as part of standard procurement, fundamental basic principle of insurance to
supply, and grant funding contracts spread the cost of the risk of any single event
with Local, State and Federal across many people. When the delivery of an
Governments essential service is motivated by profit rather
to operate a business legally in Australia than the basic principle underlying the need for
in most industries the service, government intervention is
to lawfully own or occupy for specific required. This is the basis for our call for
types of buildings and public spaces government intervention.
to import or export for trade and Government intervention into the insurance
commerce industry does have precedence in Australia. In
to comply with both State and Federal 2003 an insurance pool was created because
legislation terrorism cover was removed following the
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September 11 attacks in America, leading to highlighted that the market sees significant
market failure. issues in renewing premiums due in 2021. The
ACCC’s NAII highlights that Northern Australia is
The ACCC’s NAII does not address the definition
not a profitable place to offer insurance and the
of a market failure but suggests that even if
publication of this inquiry’s findings will only
there is not yet a market failure across the
exacerbate the existing problems without
whole of the country, government intervention
Government intervention.
is still justified.
"This has included considering the extent to A SOLUTION FOR A COMPLEX PROBLEM
which affordability and availability issues stem
from market failures, other impediments to The insurance industry is complex. That does
robust competition or underlying cost drivers. not mean there is no solution, it means a real
Without market failure, government solution may not be a simple one. The
intervention to reduce premiums may still be Townsville Chamber of Commerce believes that
justified on social equity grounds or in support due to the complexities within the industry and
of broader policy objectives". (Page 145 of the to avoid further limitations being placed on
NAII) Northern Australia's development, an
The term “market failure” was defined by environment must be created where there is
Allianz in their submission to the inquiry in not only a baseline for the essential service that
2019. insurance provides, but insurance at that
baseline is affordable and healthy competition
"While an unavailability of needed insurance remains within the marketplace. More than
would meet the technical economic definition of one of the following recommendations needs to
market failure, Allianz suggests that an effective be implemented to ensure a competitive and
market failure arguably exists if such insurance responsible industry remains available in the
is out of reach to those who need it because open market. Provided there is a combination
they cannot afford to purchase it." (page 6) of more than one of these recommendations
The NAII has identified that there was the Townsville Chamber of Commerce believes
significant non-insurance taking place which is a the issue can be resolved and the development
clear market failure of an essential service. The of Northern Australia can be a realistic and
NAII data that is already outdated and will only achievable outcome for the Australian
exacerbate the market failure in Northern Government:
Australia.
THE NEED FOR GOVERNMENT RECOMMENDATION ONE
INTERVENTION Expanding the Australian Reinsurance Pool
Corporation remit to include Northern
Several industry professionals, including
Australia and the natural events of cyclone and
insurance brokers whose business it is to
floods
identify insurance products within the market,
have been unable to source suitable products Precedent and justification for the Reinsurance
for customers in Townsville and Northern Pool
Australia. Insurance brokers within the industry,
who are also members of the Townsville The justification for the Terrorism Insurance Act
Chamber of Commerce, are unwilling to 2003 and the development of the terrorism
participate or provide evidence for fear of reinsurance pool was:
retribution by the insurers. It also needs to be
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“The terrorism events in the United States on against an unpredictable natural event like a
September 11, 2001, caused massive losses to cyclone or flood.
commercial property and corresponding
The reasoning and justification for the
insurance payouts. Following these events,
reinsurance pool are clearly being replicated in
global reinsurers refused to underwrite for loss
Northern Australia with the risk of cyclone and
or damage to commercial property caused by
flooding rather than terrorism. Since the
terrorist activity. In turn, when existing primary
inception of the ARPC, there has been a levy on
insurance policies expired, and property owners
all premiums in Australia to cover this risk.
sought to renew them, primary insurers
Policy holders in Northern Australia have been
explicitly excluded terrorism cover in those
paying between 2% and 5.3% on their premium
renewal policies. As a result, commercial
since 2003. While this is collecting a little from
property owners, including in Australia, were
many to cover the risk of a few where there is a
forced to assume the risk of loss or damage to
market failure, it is indeed following the
their properties if there were a terrorist event.”
definition of insurance.
(www.arpc.gov.au)
According to the ARPC 2019-2020 Annual
The Australian Government decided to
Report, the terrorism insurance scheme
intervene in the Australian insurance market to
currently has $13.7 Billion available for claims
protect the Australian economy from the
that arise from a terrorist attack.
potential flow-on effects of the global
withdrawal of terrorism reinsurance. In The Allianz Australia Insurance Limited
particular, the Government was concerned that submission to the ACCC dated September 13,
forcing property owners to assume their own 2019, clearly articulates and supports the idea
risk for terrorism would reduce financing and of a reinsurance pool. Allianz's model predicts a
investment in the Australian property sector, saving of over 50% on premiums for a standard
including a substantial reduction in commercial home in North Queensland if there is a
building activity. reinsurance pool. Allianz also indicated that
they would re-enter the market with an
Subsequently, a scheme was established under
insurance pool in place. This is seen as the most
the Terrorism Insurance Act 2003 (the Act) to
significant advantage to sustain lower
replace terrorism insurance coverage for
premiums and thereby stimulate and re-
commercial property and associated business
introduce competition into the marketplace
interruption losses and public liability claims.
which will be the critical component in
Under the Act, the scheme is administered by
providing a platform to develop Northern
the Australian Reinsurance Pool Corporation
Australia.
(ARPC). The scheme commenced on July 1,
2003. The terrorism insurance scheme reinsurance
pool must be expanded to include the
While the insurance industry will argue that the
geographical area of Northern Australia and the
answer to the market failure with insurance in
natural events of cyclones and floods. This is a
Northern Australia for the cover of cyclone and
critical first step in ensuring competition and
flood is mitigation either through building
sustainability of insurance markets in northern
resilience into buildings, levies for flood events
Australia.
or other infrastructure improvements, there is
no mitigation used by the insurance industry or
ARPC when it comes to the risk of terrorism. No
one would argue that mitigating against a
terrorist act would be easier than mitigating
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RECOMMENDATION TWO Northern Australia if insurers are allowed to
only insure in "safe" or "low risk" areas.
The obligation for an insurer to provide
By understanding the basic principle of
insurance for all of Australia
insurance, it is clear that Australia is not being
As part of obtaining an insurance licence in provided with the essential service that is
Australia you must provide products to cover required and Northern Australia is not insured
every part of Australia. This system works in to the standard that Australians require.
parallel to a reinsurance pool. The pool Removing cover from particular areas, either
provides confidence for insurance companies to through geographical boundaries, postcodes,
re-enter the market and competition is critical street names, or not providing cover for named
to ensuring any government intervention events like cyclones, floods, or terrorist attacks,
reaches its full potential. is not spreading the risk. Rather, insurance
companies are eliminating their exposure via
Regionalising the profitability of insurance
exiting the marketplace. The risk is not being
completely contradicts the definition of
spread across the entire country. The hard
insurance. When the risk is spread over the
reality at the moment is Northern Australia is
whole of Australia, the profitability of the
contributing to a re-insurance pool to address a
insurance industry is indeed healthy. An
market failure for terrorism which will most
estimated profit of $8.2 billion from home,
likely occur in major capital cities, but major
contents, and strata insurance in the rest of
capital cities are not contributing to cyclone and
Australia, on a gross earned premium of $69
flood risks in Northern Australia.
billion, at a gross margin of 12% over the 12
years to 2018-19 is a healthy industry (See page To drive a competitive and robust market, the
108 of the NAII). Singling out Northern Australia risk of insuring in Australia must be shared
as one region that was not profitable, with a across the whole of Australia.
recorded loss of $856 million or profit loss of
13%, does not mean insurance in Australia is
not profitable, it just means you can indeed RECOMMENDATION THREE
make more profit, and have less costs, if you
are allowed to operate in just the profitable National Insurer – Baseline of insurance for all
areas and not insure specific parts of Australia. Australians
As profit margins are pressured and
shareholders require returns, multiple There is a market failure of an essential service
insurance companies are choosing to exit these in Northern Australia and if there is not a
areas and the NAII now provides documented willingness from the private sector to provide
justification for CEO’s of corporate insurers to affordable insurance to the entire country then
recommend their company exit the market in there is no other option but for the
Northern Australia if they have not already. If Government to provide a baseline cover for the
we continue to allow insurance companies not essential services required by legislation.
to spread the risk, insurance will become harder As a minimum, the standard cover should
to get in Australia. include building and contents and public liability
The ACCC’s NAII has highlighted a problem that for properties. In the same way the
people in Northern Australian and the Government delivers other essential services to
insurance companies already knew existed. This Australians like health care, the private market
report will escalate the problem of affordable can continue to operate and provide optional
and obtainable insurance in Northern Australia. products and levels of choice coverage in
In the long term, this will not be contained to
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healthy competition freely above the essential for the respective governments would be
service baseline offered by the National Insurer. negligible due to the population of Northern
Australia and the extent of non-insurance and
As highlighted in the ACCC’s NAII, offering the
impending further decline of re-insurance.
baseline service would be profitable for the
national insurer and achieve the objectives of It should be noted that removing State and
developing Northern Australian. Federal taxes without ensuring healthy
competition in the marketplace will see these
benefits disappear.
RECOMMENDATION FOUR
Abolish Additional Fees – Stamp Duty and GST
CONCLUSION
The Queensland State Government has a role to
play and there should be an abolishment of In the upcoming budget it is imperative that
stamp duty on home, contents, and strata provisions be made in relation to building a
insurance products. competitive, robust, and sustainable insurance
market in Australia.
This should be expanded to all premiums in
Northern Australia, including cover for business A combination of the above recommendations
policies. is critical to ensure fair and affordable
insurance premiums in Northern Australia.
The Queensland Government should abolish
stamp duties on home, contents, and strata With the migration of individuals and
insurance products. State and Territory revenue businesses to northern parts of Australia as a
needs could be more equitably met through result of COVID-19 lockdowns and restrictions
other means or distribution of some of the in the south, it is timely that the
profits from the National Insurer as per Commonwealth Government seriously consider
recommendation three above. the aforementioned recommendations to
support the prosperity and development of the
It has been widely acknowledged that stamp nation.
duties on insurance products are an inefficient
form of taxation. This recommendation is in line
with recommendations from previous inquiries
into insurance and taxation issues.
Governments have previously received and
continue to enjoy a windfall gain from the
increase of insurance premiums in Northern
Australia.
As an essential service (similar to fresh fruit,
healthcare and bank account keeping fees) the
insurance products provided by the National
Insurer should be GST free, whether nationwide
or only in Northern Australia where there has
been a market failure.
As both GST and stamp duty are calculated on
premiums, the direct impact on affordability of
premiums for Northern Australia will be
significant and the comparative loss of revenue
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