Academic research finds the Cyclone Pool bringing down cost of insurance

17 September 2024

An academic researcher from Massachusetts Institute of Technology (MIT) has revealed analysis showing the Cyclone Reinsurance Pool (cyclone pool) – since its introduction – had reduced premiums for home insurance policyholders and increased the availability of insurance in northern Australia.

The research paper, ‘Insuring Correlated Climate Risk: Evidence from Public Reinsurance’, investigated how reinsurance for cyclone risk within the Australian home insurance market can mitigate the impact of extreme weather.

The paper’s author Adam Solomon, a PhD candidate at MIT in the USA, reviewed publicly available data and found that the cyclone pool in northern Australia was bringing down the cost of insurance.

According to the analysis, home insurance premiums decreased by 10 per cent on average and up to 27 per cent for the highest cyclone risk properties, as a result of the cyclone pool.

The paper also showed that insurance was now available to 6 per cent more of the average houses in northern Queensland, and 11 per cent more of the highest risk houses.

In the academic paper, Mr Solomon said the cyclone pool has had demonstrable positive effects.

“Making sure people have fairly priced financial protection against these risks is critically important.”

“I think it can be an example to governments in other countries and regions about how to help people obtain fairly priced protection against risks to their livelihoods,” Mr Solomon said.

The research paper also noted that while some smaller insurers were still to enter the cyclone pool, they were not expected to have a significant impact on premium costs, given the pool already included the largest insurers and 95 per cent of policies.

Australian Reinsurance Pool Corporation is in the process of reviewing the current cyclone pool premium rates that were set in 2022 and is considering minor changes which intend to be applicable from 1 April 2025.

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