Minister warns insurers over ‘unfair’ premiums in disaster hotspots

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Insurance giants are the latest big companies attracting unwanted government attention over some of their prices, hot on the heels of Labor’s energy market intervention and its scrutiny of bank deposits.

There’s no question home and car insurance premiums are soaring, but Financial Services Minister Stephen Jones has singled out one group of affected customers in particular: people who have renovated their homes to deal with the risk of natural disasters such as floods.

Last year’s floods in NSW and Queensland were the most expensive extreme weather event for insurers in Australia.Credit: Dan Peled

In a warning to the industry, Jones this week told insurers that if people changed their homes to make them more resilient to such risks, it should be reflected in their premiums.

“If they are lumped with the same premium as people who are not taking those steps, then that’s unfair. Not only is it unfair, but it’s also bad business and bad economics. It sends all the wrong signals,” Jones said on Monday.

Jones’ complaint is understandable, and it no doubt reflects community worries about the jump in the cost of living. But insurance affordability is a problem that’s plagued successive governments – and it’s one that’s proving incredibly hard to solve – which suggests we’re unlikely to see an energy market-style intervention to simply bring down premiums.

Insurance for people living in areas at the highest risk of floods, fires and other natural disasters has become so expensive that it is unaffordable for many, at a time when climate change is making such disasters more frequent and severe.

Governments know they will inevitably pick up more of the cost of rebuilding from future disasters if people don’t take out insurance, so they want to make these premiums affordable. But there are no easy wins. Subsidising premiums probably won’t help because, as Jones says, it encourages people to build “the wrong buildings in the wrong places”.

The Morrison government vowed to bring down premiums for cyclone-prone areas through a $10 billion reinsurance pool, but exactly how this will affect the actual premiums paid by customers remains to be seen.

There is near-universal agreement that more needs to be done to mitigate the risks, such as upgrading buildings to be more resilient to cyclone or flood damage. But the amounts of investment needed to do this at scale are vast.

The government is also trying to build up its data on insurance affordability, which it hopes can help inform households about ways to cut their insurance bill. What can Jones do to push insurers to pass on any savings?

While the government took the controversial step of intervening directly in the energy market to bring down prices, Jones appears more likely to apply indirect pressure on insurers over their pricing.

It’s possible he could bring in the competition regulator – as the government did to scrutinise banks’ deposit pricing – though it’s still early days.

In the insurance companies’ defence, they maintain that individual customers can often get discounts when they have made appropriate changes to their homes.

But unfortunately for the wider community, there are no signs of a broader decline in insurance premiums anytime soon. Official figures last week said average home premiums surged by 14.3 per cent in the March quarter compared to last year, while average car insurance premiums jumped 11.6 per cent, Jarden analysts report.

Perfect storm

Insurers explain such rapid growth in premiums by pointing to a perfect storm in the industry.

First, they blame a horror run of natural disasters, capped off by last year’s disastrous floods in NSW and Queensland, which led to $5.8 billion in claims, making them the most expensive extreme weather event in the country’s history.

The wild weather not only drove up insurers’ costs from paying out claims, it also made global reinsurers (insurance companies to the insurers) more tentative about Australia, leaving the local players holding more of the risk themselves.

Second, they point to soaring building material costs, shortages of tradies and car parts, and other sources of inflation that are being passed on to customers.

Investors, meanwhile, generally view insurers as winners from a backdrop of high inflation and rising interest rates – notwithstanding the risk that inflation can eat into profits if insurers underestimate the cost of future claims.

Local giants Suncorp, Insurance Australia Group and QBE have all enjoyed strong share price gains of more than 10 per cent this year, compared with a rise of less than 4 per cent in the wider market.

One reason for the rise is that insurance companies make higher returns on their bond portfolios when interest rates are rising. But the surge in premiums is no doubt supporting investor confidence as well.

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