Tropical Cyclone Alfred: The Cyclone Reinsurance Pool meets a major test

Tropical Cyclone Alfred posed significant risks for communities in South-East Queensland and Northern NSW, areas not accustomed to cyclone activity and not built to withstand cyclone conditions. Fortunately, Alfred weakened before making landfall; however heavy rain, strong winds and flooding are still expected to cause severe damage in those communities. The Insurance Council of Australia (ICA) has declared an insurance catastrophe, and some have predicted claims will run into the billions of dollars.

Insurers are on the frontline of assessing claims from policyholders.  Behind them is the Cyclone Reinsurance Pool (Cyclone Pool), a reinsurance vehicle recently established by the Commonwealth, designed to provide additional support. In this article, we examine the Cyclone Pool as it faces a major test.

Establishment of the Cyclone Pool

The Commonwealth Government announced the formation of the Cyclone Pool in 2021[1] to broaden insurance availability and drive down premiums for households and small businesses in cyclone-affected areas of northern Australia. Many of these communities have experienced withdrawal of insurers and substantial increases in premiums due to the heightened risks of cyclone activity.

The Australian Reinsurance Pool Corporation (ARPC), a Corporate Commonwealth Entity, was tasked by the Commonwealth Government with establishing the Cyclone Pool. This choice was logical choice given ARPC’s expertise, developed through operating the Terrorism Reinsurance Pool (Terrorism Pool) since its inception in 2003 in the aftermath of the 9/11 attacks. The ARPC enabling legislation, the Terrorism and Cyclone Insurance Act 2003 (Cth) (the Act) and the Terrorism and Cyclone Insurance Regulations 2003 (Cth) (the Regulations), were amended to facilitate the establishment of the Cyclone Pool.

The Cyclone Pool commenced on 1 July 2022 and by the end of 2024, all applicable insurers had joined[2]. There are some early signs from ACCC monitoring that the Cyclone Pool is delivering some premium relief for those insureds in regions facing a higher risk of cyclones[3].

Structure of the Cyclone Pool

Similar to the Terrorism Pool, the Cyclone Pool provides reinsurance cover to general insurers that write policies with property owners and businesses. This model provides risk transfer to primary insurers rather than taking on direct liability from the insureds. This approach contrasts with other initiatives taken by Australian governments to address perceived market failures, including formation of statutory insurance schemes such as third-party motor accident insurance and workers compensation insurance.

Participation in the Cyclone Pool is mandatory to better average risk and avoid adverse selection issues. Insurers must cede 100% of their eligible risks[4], subject to exceptions (discussed below). Insurers face pecuniary penalties if they do not comply[5].

The Cyclone Pool is funded through premiums charged by ARPC to cedants, enabling ARPC to build capital reserves for the Cyclone Pool and take out retrocession cover to spread some of the risk to the reinsurance markets. The Commonwealth has provided a guarantee for the Cyclone Pool’s liabilities, notionally set at $10 billion annually, with provisions to increase this amount to cover cyclone-related liabilities[6]., Commonwealth support, and liability exposure, could therefore potentially exceed $10 billion. For context, the ICA estimates that the claims cost from Cyclone Tracy in 1974—the costliest cyclone in Australian history—would be approximately $7.4 billion in 2023 dollars[7]. 

What risk can be ceded to the Cyclone Pool?

The relevant elements of Cyclone Pool cover are:

Type of risk covered

The concept of a ‘Pool Insurance Contract’ defines what insurance policies may (and must) be ceded to the Cyclone Pool. There are detailed provisions that define the specific risks covered[8], which in broad terms includes:

• home building and contents
• building and contents for common property of some residential strata schemes
• other property and contents with insured value up to $5 million (i.e., SME cover), and
• business interruption cover.

There is subtly in the way these provisions operate, including different functional definitions. For example, a strata scheme with more than 50% of floorspace used ‘wholly or mainly’ for non-residential purposes (e.g., a mixed-use commercial building) will only be covered if the sum insured is less than $5 million[9].

Type of loss covered

The Cyclone Pool responds to ‘eligible cyclone loss’, which is loss arising from a weather system that the Bureau of Meteorology (Bureau) has declared to be a cyclone event[10]. The nature of the losses may include wind, rain, rainwater runoff, storm surge or flood, amongst other things[11].

Timing of losses

An ‘eligible cyclone loss’ must occur during the relevant ‘claims period’, which starts at the point the Bureau has identified the cyclone started or re-intensified and ceases 48 hours after the Bureau has determined the cyclone has ended[12].

Location of risk

Insurers are only required to cede cyclone risks to the Cyclone Pool for areas with significant cyclone exposures. Many postcodes around Australia have been excluded on the basis that they experience negligible cyclone risk[13], although this may need to be updated with changing weather patterns; for instance, Tropical Cyclone Alfred was expected to be the first cyclone as far south as the Brisbane metropolitan area in 50 years.

How will the Cyclone Pool respond to Tropical Cyclone Alfred?

Following advice from the Bureau, the Chief Executive of ARPC issued a determination on 25 February 2025 commencing the claims period from 8.30 am that day[14]. He subsequently issued a notice on 8 March identifying the end of the event at 6.00 am on that day following further advice from the Bureau[15]. In this latter notice, ARPC identified the end of the claims period as 6.00 am on 10 March, 48 hours after the declared end of the event.

Insureds impacted by Tropical Cyclone Alfred will submit claims to their insurer for assessment as per the usual process. The declaration of an insurance catastrophe by the ICA will expedite the processing of these claims. Insurers will need to consider whether each individual claim meets the abovementioned parameters to assess if a claim can be made on the Cyclone Pool.

If an insurer is unable to claim on the Cyclone Pool for a particular insured loss, there may be other reinsurance that responds, or the loss may simply be retained by the insurer.

Is the claim period long enough?

An emerging issue from the early experience of the Cyclone Pool in 2023 and 2024 is whether the 48 hour claims period after the declared end of a cyclone is adequate. For instance, losses arising from flooding that occurs following the end of the claims period will not be covered by the Cyclone Pool, even if that flooding was a direct result of the cyclone. 

The issue was detailed before the Inquiry into the Cyclone Reinsurance Pool currently being conducted by the Parliamentary Joint Select Committee on Northern Australia[16]. Some stakeholders have advocated for an extension of the claims period, noting that:

• A 48 hour window is a relatively short period after the event, making it challenging to identify with precision whether a loss falls within the claims period results from the cyclone’s effects once it has been downgraded.
• Reinsurance markets typically adopt a standard claims period of 168 hours (7 days), suggesting that there is a potential for the 48 hour period to offer less cover than is available in reinsurance markets.[17]

Others have observed that:

• The current period extends beyond the point at which the Bureau has determined the cyclone has ended, meaning the claims period reflects the event conditions, rather than imposing a fixed 168-hour limit, which may be insufficient for prolonged events.
• Extending the claim period would broaden the coverage of the Cyclone Pool across a wider geographic area and would likely dilute the impact on delivering savings to Northern Australia.[18]

The Committee has recommended that the Australian Government consider this issue, along with the impact on insurance premiums, as part of its scheduled review of the Cyclone Pool this year[19]. In the meantime, ARPC commissioned research indicating that expanding the coverage period after the declared end of the cyclone event from 48 to 168 hours would increase the claims cost by approximately 5%, which would need to be reflected in additional premiums collected by ARPC.[20].

Is there a need for broader reform?

The deepening effects of climate change and the growing challenges of insurance affordability present important policy issues for both the Government and the insurance industry.  There have been calls by some for an expansion of the Cyclone Pool to cover non-cyclonic floods and other natural perils. The ICA has advocated for more holistic consideration of policy settings, including through its Future Proof Australia campaign which focuses on land use planning, building standards and action on climate change[21]. The Government has convened the Insurance Affordability and Natural Hazards Risk Reduction Taskforce, a cross-government taskforce led by the Department of Prime Minister and Cabinet, to address these and related issues.  This taskforce is due to report later this year and we will keep you updated on the outcomes.

If you would like to discuss any of the issues raised in this article then contact Simon or one of our other specialist partners, Mark Doepel or Matt Ellis.

[1] More affordable access to insurance for Northern Australians | Treasury Ministers

[2] ARPC announces full participation of mandated insurers in cyclone pool - ARPC

[3] Insurance monitoring – Third report following the introduction of a cyclone and cyclone-related flood damage reinsurance pool (Australian Competition and Consumer Commission: September 2024) [Link]

[4] Section 8A of the Act.

[5] Section 127F of the Insurance Act 1973 (Cth).

[6] Section 35A of the Act.

[7] Insurance Catastrophe declared for Tropical Cyclone Alfred - Insurance Council of Australia

[8] Section 8B of the Act and section 5B of the Regulations.

[9] Sections 8B(3)(c) and (d) of the Act and sections 5B(6) and (8) of the Regulations.

[10] Section 8C(2)(a) of the Act.

[11] Section 8C(2)(b) of the Act and section 5C of the Regulations.

[12] Sections 8C(2)(c) and 8F of the Act and section 5D of the Regulations.

[13] Terrorism and Cyclone Insurance (Areas of Negligible Cyclone Risk) Determination 2023 (Cth), section 8A(7) of the Act.

[14] Terrorism and Cyclone Insurance (Beginning Cyclone Event – Tropical Cyclone Alfred (20250228) – Instrument (2025) [Link].

[15] Terrorism and Cyclone Insurance (End Cyclone Event – Tropical Cyclone Alfred (20250228) – Instrument (2025) [Link].

[16] Inquiry into the Cyclone Reinsurance Pool: First Report on the Cyclone Reinsurance Pool (March 2023) (Parliament of Australia – Joint Select Committee on Northern Australia: March 2023) [Link], Chapter 2.

[17] Ibid, Paras 3.66-3.71.

[18] Ibid, Paras 3.72 – 3.74.

[19] Ibid, Recommendation 2.

[20] Estimating Cyclone Pool Premiums with 168 Hour Coverage Period (Finity Consulting: September 2024) [Link], p 2.

[21] Future Proof Australia - Insurance Council of Australia