The announcement yesterday by the Northern Territory government that it is selling the Territory Insurance Office’s insurance assets to Allianz Australia for A$236 million has many worried their premiums will increase. Some of this concern is no doubt a result of significant premium increases in North Queensland following cyclones Larry and Yasi. But is all this concern justified?
Looking first at the increases in North Queensland, the exposure in that region is to highly intense cyclones and large catastrophic insurance losses have followed. North Queensland has a very long east-facing coastline all exposed to cyclone. This part of northern Australia is home to numerous cities and towns, which means the risk there is much larger for insurers. Cyclones Yasi and Larry each cost insurers in excess of A$1 billion in claims paid.
While the Territory’s economy is growing, it just does not have the same level of infrastructure, in resorts, large hotels, high rises, factories, warehouses and residential housing. As a result, the risk of such occurrences is considered significantly lower in the Northern Territory than in North Queensland.
Since Cyclone Tracy (coming up to its 40-year anniversary), building codes in Darwin and the Northern Territory in general have been improved and are the toughest in Australia. This has reduced the damage caused when cyclones do hit. For example, with a combination of lower intensity and buildings built to a higher code, 2011’s Cyclone Carlos caused relatively minor property damage in Darwin.
Over the past 10 years, the majority of Australian insurers have moved from community rating to risk rating due to improvements in technology. In the case of homes and other buildings this is through geospatial technology. It allows the overlay of cyclone, flood and other maps onto street maps and satellite images of addresses.
In motor insurance we will see more use of telematics to reward good driving behaviour. Poorer drivers will pay more for the additional risk they create.
The same goes with home or business insurance. Premiums are highly individualised in terms of price because no two houses are the same when it comes to construction, value, location or risk. Premiums reflect the price of a home owner transferring the financial risk, from an insured peril, from themselves and their family to the insurer.
The reality is that while the Northern Territory set up and owned TIO, it is run on a completely commercial basis. Its pricing is not set by government and it is not subsidised in any way. From my research, in areas such as cyclone cover, TIO has not been the cheapest; its prices have sat at the middle of the market.
With flood insurance, the same applies. Regardless of who owns TIO, pricing for flood is moving from community rating to the risk address.
If you do not live in a flood-prone area, this is good news for you. If you are in a flood zone, then your premiums are likely to increase due to the flood risk of your property.
Flood is a concern right across Australia and governments at all levels are, or should be, looking at this. One of the positives coming from the sale of TIO is that the Territory government has pledged A$50 million in flood mitigation for Rapid Creek, Katherine and the Darwin Rural Area. Whether this is enough is yet to be seen. From my observations, I would like to have seen funding go to Alice Springs as well, as I foresee significant flood losses in that town in the future.
In summary, I see no difference in increase in pricing due to the sale of TIO to Allianz. Over time, the cost of insurance may well be reduced, as there will be some economies of scale with TIO not having to stand alone as a relatively small insurer. Allianz, one of the world’s largest insurers, has greater capacity to hold risk itself and greater buying power when it comes to re-insurance.
While the TIO was originally established due to insurers being reluctant to offer workers’ compensation cover in the Territory, today it is serviced by 12 insurers. All offer cyclone cover and only one does not provide flood cover.
All other states have sold their general insurance companies. As the Territory matures and its economy grows, it does seem right for the government to move out of this area and concentrate on other areas where government is the most appropriate supplier of the service. In my view, the government achieved a very good price on the sale for the benefit for all Territorians.