Productivity Commission criticises premium subsidies, calls for cyclone pool phase-out

The Productivity Commission has cautioned against more government-backed premium subsidy measures in future, warning such “intervention” distorts decision-making by individuals and businesses and will only put them in “harm’s way” as climate risks grow.

It also urged the Federal Government to consider setting a medium-term timeframe for the phase out of the cyclone pool reinsurance scheme, giving private insurance providers enough time to secure alternative reinsurance services.

The pool commenced in July last year backed by a $10 billion government guarantee and is aimed at reducing premium prices and increasing competition in cyclone-affected regions by foregoing a profit margin.

“Relative changes in insurance premiums play an important systemic role in helping households and businesses understand the climate risks that they face,” the Productivity Commission, the government’s independent research and advisory body, says in a report.

“While rising premiums are undesirable for individual households and businesses, they will be able to identify when high insurance premiums render unviable a proposed investment (either the addition to an existing structure or development of a new structure), or more generally reduce an investment’s commercial feasibility.”

According to the Productivity Commission, government “interventions” in private insurance markets risk subsidising the movement of individuals, households, and businesses into “harm’s way”, and increasing overall adaptation costs.

“Australian governments should avoid expansion of climate-related insurance sector intervention,” the report says.

The just released Advancing Prosperity report – part of the government body’s five-year inquiry into the country’s productivity performance – proposed 29 reform directives drawn from 71 separate recommendations.

Substantial parts of the report focus on general insurance and climate adaptation.

The report backs axing stamp duty on insurance premiums as part of its proposed review of Australia’s risk protection system. It says such a move could lead to incremental gains in the near-term.

On climate risks, the report says increasingly detailed climate projections will be important in helping insurers accurately price climate risks over the years ahead.

“An inability to accurately price physical climate risks may lead private insurers to stop offering insurance products that cover the effects of particular climate events in particular regions altogether, being unable to judge whether they are taking on an acceptable level of risk,” the report says.

The report says the retreat of private insurers from particular regions or activities will weigh on productivity growth, by removing one of the mechanisms by which people are able to assess and manage risk.

If such a scenario materialises, it will “leave governments vulnerable to becoming insurers of last resort for any under-insured activity that remains,” the report says.

“The … commencement of the northern Australia reinsurance Pool risks falling into this category.”

Click here for the report.