Government Response
to the Senate Economics References Committee
Report:
The asset insurance arrangements of Australian
state governments
July 2012
Introduction
Following the extensive flooding that occurred in Queensland over the 2010-11 summer, on
3 March 2011, the Senate referred for inquiry issues relating to the insurance of state
government assets to the Senate Economics References Committee.
The referral was based on a Notice of Motion from independent Senator Nick Xenophon.
The notice directed the committee to examine:

the provisions of the Tax Laws Amendment (Temporary Flood and Cyclone
Reconstruction Levy) Bill 2011 and the Income Tax Rates Amendment (Temporary
Flood and Cyclone Reconstruction Levy) Bill 2011,

current insurance and reinsurance arrangements of the states and territories of their
assets and infrastructure, and

the appropriateness of fiscal arrangements for natural disaster reconstruction
efforts.
The Commonwealth has considered the four recommendations made in the report and
provides the following responses.
Recommendation 1: The committee recommends that the Commonwealth Government
consult with state and territory governments to ensure that the states’ and territories’
captive insurance and reinsurance arrangements are reported transparently and on a
comparable basis.
Commonwealth position: The Commonwealth supports this recommendation.
The Natural Disaster Relief and Recovery Arrangements (NDRRA) Determination was
amended on 21 March 2011 to require state and territory (State) governments to
commission an independent assessment of the adequacy of their insurance and reinsurance
arrangements.
The Department of Finance and Deregulation (Finance) is currently reviewing the
independent assessments and will publish its findings once the review is complete.
In line with the amendments to the NDRRA, each State is also required to produce and
publish its independent assessment at intervals no greater than three years apart; and
following any significant change in its insurance arrangements (including any reduction in
the policy limit), or a major insurable disaster occurring in that State.
The independent assessments submitted by each State will be made publicly available on
respective State websites.
The Commonwealth will continue to consult with State governments and monitor
compliance under the NDRRA Determination.
Recommendation 2: The committee recommends that the Commonwealth Grants
Commission ensures that as part of the current redesign of its data request, state and
territory governments are required to include their past insurance and reinsurance
receipts for natural disaster insurance premiums. These data must be taken into account
by the Commission in determining the states' GST share.
Commonwealth position: The Commonwealth notes this recommendation.
The Commonwealth Grants Commission (the Commission) is an independent statutory body
which recommends how the revenues raised from the Goods and Services Tax (GST) should
be distributed to the states to achieve horizontal fiscal equalisation (HFE).
The Commission advises that, as part of its data request for its 2012 Update of GST Revenue
Sharing Relativities, it has sought States’ premium payments and insurance receipts for the
last four financial years. All States that have private insurance provided this information to
the Commission. The information will be used by the Commission to estimate States’ net
expenses on natural disaster relief and recovery, which will then be used to calculate the
recommended GST distribution for 2012-13.
Recommendation 3: The committee recommends that a particular focus of the Natural
Disaster Insurance Review into the adequacy of current insurance arrangements should be
on whether the international insurance market offers reinsurance for the states' and
territories' road networks.
Commonwealth position: The Commonwealth is unable to support this recommendation.
The final report of the Natural Disaster Insurance Review was provided to the Government
on 30 September 2011 in accordance with its Terms of Reference, and was publicly released
on 14 November 2011.
Given this timing, the Natural Disaster Insurance Review did not consider Recommendation
3 of the Senate Economics References Committee report on The asset insurance
arrangements of Australian state governments.
It is anticipated that the adequacy of reinsurance arrangements for State road networks will
be amongst the issues considered as part of the review of State insurance arrangements
referred to in the response to recommendation 4 below.
Recommendation 4: The committee recommends that the Commonwealth Treasury clarify
what is meant by the term 'cost-effective' as it relates to the 2011 NDRRA Determination
and the scrutiny of the states' and territories' insurance arrangements.
Commonwealth position: The Commonwealth notes this recommendation.
The Commonwealth has been providing information to the States to assist their
understanding of how the Commonwealth will review the States’ independent assessments
of their insurance arrangements.
The NDRRA Determination was amended on 21 March 2011, to incorporate a new process
which requires the States to have an independent assessment undertaken of their insurance
arrangements in relation to natural disaster recovery and reconstruction costs and submit
those assessments to the Commonwealth.
Finance is undertaking a review of the appropriateness of States’ insurance arrangements
and will publish as well as report the outcomes to the Commonwealth Minister for
Emergency Management.
Clause 4.6.4 of the NDRRA Determination sets out that each review will be guided by
principles that include that a State has a responsibility to put in place insurance
arrangements which are cost effective for both the State and the Commonwealth.
In looking at whether arrangements are appropriate, including whether they are cost
effective, the Finance review will consider the risk management practices evident in each of
the States, as well as their financial exposure related to restoration or replacement of
certain essential public assets that are at risk of being damaged as a direct result of a natural
disaster. In this regard, the following issues will be taken into account:
•
States’ risk management practices,
•
details of essential public assets and details of historical losses on these assets arising
from natural disasters,
•
the risk profile of the State, based on type and frequency of disasters that the State is
exposed to,
•
history of NDRRA eligible disasters, and support received from the Commonwealth
under the NDRRA Determination,
•
details of relevant insurance policies, or information on approaches that the State has
made to the market for uninsured assets, and
•
other policies for managing financial risks relating to natural disasters.
This guidance was provided to the States to assist in undertaking their independent
assessments. As these independent assessments by States and reviews by the
Commonwealth are a new requirement, the approaches to evaluating cost-effectiveness
(and broader measures of appropriateness) are necessarily being determined as work
progresses and knowledge is gained.