Monday, February 23, 2015

Insurance: The case of the TIO revisited

Ever since NQ insurance premiums became in issue with a failure in the strata insurance market in 2011 the pet shop parrots have been spruiking the virtues of the TIO in Darwin.

This led to the somewhat embarrassing incident at the parliamentary inquiry in Cairns where it turned out neither the Insurance Council or the politicians had any idea that the TIO was not regulated by APRA and that the Australian Government was effectively the underwriter of last resort if anything went wrong.

The TIO always claimed an objective to comply with APRA standards anyway but that probably shouldn't be taken for granted given the standard of governance in the NT. Despite some economic prosperity in recent years the NT is effectively a basket case failed state propped up by Canberra. This was noted today on the recent TIO privatisation:
Former TIO CEO Richard Harding told the meeting TIO had $30 billion of insured assets, of which 80% were in greater Darwin. It could not diversify its risk because of government ownership and was competing against national insurers with access to global markets.
TIO had to spend about 30% of its premium dollars on $700 million of reinsurance that would cover a one-in-250-year event. Cyclone Tracy, which devastated Darwin in 1974, was a one-in-600 or 700-year event, so another storm of that size would mean costs falling onto the Government.
Cyclone Tracy often pops up by people trying to equate risk between the NT and NQ. You only have to go to the Bureau of Meteorology to find the NT northern region does indeed have lower cyclone risk relative to the eastern region. The insurance cost of Cyclone Tracy in 2011 dollars was $4 billion.

There were good reasons why state governments abandoned exposure to private insurance risks concentrated within their state as the concentration and value of privately insured property grew. I continue to be perplexed by the number of people confidently spruiking unsubstantiated anecdotal 'evidence' and simple solutions to something complex and poorly understood.

The role particularly of reinsurance, capital and prudential standards were totally lost on the parliamentary committee which simply didn't have the expertise or support to properly address the issue in their inquiry. Information on costs submitted by the Insurance Council to the parliamentary inquiry was that reinsurance comprised about 6% of the premium on a national basis which is way less than the TIO at 30%.

Anyway, Bill Shorten was in town last week and proclaimed that NQ property insurance was a market failure. Never mind that it was he who was actually the responsible minister at the time in 2012 who responded thus when the first inquiry by the Australian Government Actuary instigated by Bill himself found there was no market failure: Australian Government Actuary Report Investigation into Strata Title Insurance Price Rises in North Queensland

Note: At the time insurance premiums were increasing rapidly between 2010 and 2012 APRA was reviewing and implementing revised standards around insurance concentration risk capital at a time when global reinsurance markets were stressed. This was the Suncorp experience in the 2011 reinsurance market: Suncorp burnt by reinsurers.

Previous post: Reinsurance and FNQ

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