Insurance coverage pass through event – guidance note

  • Accepting submissions
Category: 
Compliance procedures & guidelines
Status: 
Date initiated: 
28 August 2020
Effective date: 
1 July 2021
Contact: 
AER General Inquiries AERInquiry@aer.gov.au
AER reference: 
AER201074

Overview

Under the National Electricity Rules and Gas Access Arrangements, the AER is required to consider a broad range of factors in assessing whether a cost pass through event has occurred. Insurance coverage pass through events allow a Network Service Provider (NSP) to recover material costs that are incurred above the Network Service Provider’s insurance policy limit or coverage.

Network operators face changing liability insurance market conditions, and following feedback from stakeholders, we are seeking to provide the industry and consumers with greater clarity on the principles the AER will use and evidence we will require to guide and inform our decision making to assess an insurance coverage pass through event should one arise.

This consultation paper commences the process to develop a guidance note that will help clarify the key matters the AER is likely to have regard to when assessing an insurance coverage event application. This consultation paper aims to:

  1. Set out the AER’s preliminary views on the key elements that will guide the assessment of an insurance cap / coverage pass through event application.
  2. Seek comment from NSPs and other stakeholders about these key elements of our proposed assessment approach that will be used to develop a draft and final guidance note.

At the conclusion of this process, NSPs will be better informed about possible pass through application assessment outcomes, including in the context of a changing and volatile insurance market. Our intention is that the guidance note be broad enough to cover all possible insurance coverage events.

Background

We note the recent changed insurance market conditions, characterised by rising insurance premiums and withdrawn capacity, and the impact of recent major bushfire events across Australia. This may lead to NSPs experiencing future insurance coverage gaps and the potential for more catastrophic circumstances that are not covered by commercial insurance. In this context, a number of NSPs have sought to refine how the insurance coverage pass through events are defined and for clarification about how the AER would assess an insurance coverage pass through event application.

We consider the primary question centres around our likely assessment approach for how we will identify the level of insurance that an efficient and prudent NSP would obtain, or would have sought to obtain, in respect of the event, and how we will assess the efficiency of the NSPs actions and decisions in relation to the positive change event.

A key issue for this assessment is to determine whether the NSPs decisions in obtaining a particular level of insurance cover are prudent and efficient, having regard to a number of factors, including its risk tolerance levels, insurance policy structures, past liability claims, mitigation practices, individual operating environments, prevailing insurance market conditions and availability of any other risk-mitigating insurance products. Ultimately, we will need to form a view about whether this results in an efficient allocation of risks between the NSP and its customers.