Insurance industry participants, particularly those involved in the areas of “emerging risks”, are now developing new products to respond to perils not covered under traditional insurance products (e.g. drought and excessive rainfall). However, there has not been a huge uptake of these products since their release. By 2016, unsubsidized multi-peril crop insurance (MPCI) products in Australia were being purchased by less than 1 per cent of crop farmers.
In response, the Independent Pricing and Regulatory Tribunal (IPART) were asked to evaluate five measures to increase its uptake. IPART also considered a proposed subsidy for MPCI premiums. It recommended that a subsidy, if introduced, should only be introduced as a temporary measure as it could not find evidence that the low uptake of MPCI was due to a market failure. It also found that the expenditure on an effective subsidy for insurance would be greater than any savings in drought assistance.
IPART considered that a subsidy would be a more effective tool to increase the uptake of MPCI than a stamp duty waiver as it would provide the impetus for people to investigate MCPI and once there is sufficient uptake, it would drive the costs down enabling the Government to phase out the subsidy.
However, in responding to the IPART report, the Government declined to introduce a subsidy scheme. Instead, it announced that it would remove the 2.5 per cent stamp duty on MPCI from 1 January 2018 to make it more affordable for farmers. IPART consider that this measure is unlikely to reduce the costs of the insurance enough to materially increase the uptake of insurance.