Ombudsman's insurance crisis report says ‘the show must go on’

The Australian Small Business and Family Enterprise Ombudsman, Bruce Billson, has today released an interim report into whether the creation of a Discretionary Mutual Fund (DMF) would be able to solve the insurance crisis facing Australia’s amusement, attractions and tourism industry.

Releasing The Show Must Go On interim report, Billson commented “there is a clear and present danger facing the amusement and recreation sector because an inability for these businesses to get insurance cover means that many of the attractions people know and love won’t be able to operate.

“The lack of insurance coverage could lead to the closure of businesses in the amusement and leisure sector, significant job losses - particularly in regional areas, stranded assets and loss of economic activity generated by metro and regional shows and amusement parks.”

The interim report explores whether a Discretionary Mutual Fund (DMF) can be a durable solution and discusses required legislative reform by states and territories to ensure it is ‘fit for purpose’. It also highlights the need for DMF to be recognised and accepted as a suitable solution by councils and showground managers.

Advising that said the interim report seeks urgent feedback from all stakeholders by 3rd November to the ideas and questions raised in the report, Billson explained “we are calling for submissions from those in the industry so we can further understand any issues before we release a final report to government

“As businesses look to re-open after lockdowns, this issue is a shattering blow for those small and family businesses in the amusement, leisure and recreation sector which will be forced to stay shut because they can’t get insurance.

“There is a very real possibility shows won’t go on - something has to be done for the show to go on. A DMF may represent the only workable solution.”

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has been reviewing a proposal by the Australian Amusement, Leisure and Recreation Association (AALARA) to establish a DMF as a solution to the critical and immediate need for insurance in the sector.

The interim report found the lack of affordable insurance was not the fault of the amusement industry but due to a “hardening” in the global insurance market. Very few insurers are willing to insure the industry, and premiums - when available - had risen by as much as 200%.

The report states “in many instances the policy is priced such that it may as well not exist because small operators have no capacity to pay for the cover they need to continue operating,” the report says.

“In the case of the amusement, leisure and recreation sector, there isn’t an offering that provides full coverage.”

Public liability insurance coverage is a legal requirement for the operation of rides at showgrounds and fixed installations, both through contractual obligations and obligations imposed on councils and other landowners by state and territory governments.

DMFs operate to provide cover on a discretionary basis to a group of individuals or organisations that have a similar risk profile. Under a DMF, members who meet requirements would have access to a certificate of protection, enabling them to operate these amusement rides.

Click here to view The Show Must Go On interim report and overview

Submissions should be sent by COB 3rd November 2021 to: inquiries@asbfeo.gov.au

Report Overview - October 2021
The Show Must Go On: Is a discretionary mutual fund the solution to the insurance crisis facing Australia’s amusement, leisure, and recreation sector? 
Background 
• The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) conducted a self-generated inquiry in 2020 into the insurance market for small business, finding significant dysfunction for several sectors. 
• The Amusement, Leisure, and Recreation Association (AALARA) submitted to that review noting that many members were facing closure and/or stranded assets due to the unavailability of insurance. 
• AALARA then approached the Federal Government to seek support to establish a discretionary mutual fund (DMF). 
 
Preliminary findings 
• A DMF suits the industry represented by AALARA. 
• A DMF may be a suitable way to address the current insurance crisis facing the industry. 
• The suitability and durability of a DMF solution for the sector will depend heavily on: 
   o support for legislative reform from states and territories, and willingness to accept the solution by councils and land/showground managers. 
   o the final makeup of the membership. 
   o the cost of premiums and reinsurance, the management of the DMF and any management costs, and the size of any claims in the first years of operation. 
 
About Discretionary Mutual Funds (DMFs) 
• DMFs operate to provide risk cover on a discretionary basis to a group of individuals or organisations, through a ‘Certificate of Protection’. 
• DMFs do not offer an insurance product: o Under traditional insurance coverage, a policy holder has a contractual right to have their claim paid upon meeting the policy’s terms and conditions. 
   o Under DMF coverage, the DMF’s members are entitled to submit a claim for indemnity to the DMF’s board, which may or may not approve the claim, at its discretion. 

Benefits of a DMF 
• DMFs are often created to address market failure or significant dysfunction. 
• DMF members are accepted or rejected by the Directors, who have significant industry knowledge, allowing them to more closely monitor risk profiles of those covered. 
• DMF membership can also be predicated on compliance with a range of risk management and training protocols to lessen the risk profile across the membership. 
• Because DMFs do not have shareholders to make returns to, they are able to operate on slim margins, potentially reducing costs to members. 
• DMFs can offer additional services to their members, adding value over the protection offered. 

Challenges 
• The DMF should be fully funded for the first year, requiring a reasonable amount of start-up capital. 
• Many pieces of state, territory, and local government legislation and regulation require businesses operating on their land to hold insurance, which a DMF cannot offer. 
   o To address this, these pieces of legislation and regulation could be amended to allow membership of a DMF in lieu of insurance where insurance is not available, or the market is significantly dysfunctional. 
• A DMF should be established in such a way to ensure its ongoing durability. 
• Consumers may have concerns about the discretionary nature of coverage. 

Alternatives 
• A range of alternative options have been considered to address this issue, including a captive, self-insurance, group insurance schemes, a reinsurance pool, tort reform to address risks (‘the New Zealand solution’), implementation of a National Injury Insurance Scheme, and hybrid models. 
• A recent entrant to the market has been Coversure, a respected UK-based insurer.

Here, The Show Must Go On interim report claims that Coversure "only provides $10 million coverage (half of the $20 million required by most legislation/regulation); that industry is reporting premiums of at least double that they were previously paying (and) may not cover the whole market".

However, Australasian Leisure Management understands that statements in relation to Coversure may not be accurate. 

Article amended, 11am 28th October 2021, to reflect that references to Coversure in The Show Must Go On interim report may not be correct.

Image: The Barra Fun Park in Townsville was reportedly closed as a result of being unable to secure insurance.