Being priced out of insurance could be a disaster
Soaring insurance premiums driven by bigger bushfires and floods means building codes, land use and national standards must be considered to lessen the risk of Australians being left exposed, argues Susan Stone.
Over the past 10 years insurance costs have risen at almost twice the rate of average inflation. In the past year, that increase has been almost three times as much as the CPI.
The biggest source of insurance cost increases is the number and severity of floods and storms. According to the Insurance Council of Australia, in 2022, there were over 300,000 disaster-related claims lodged, costing $7.3 billion.
The floods in NSW and Queensland were the costliest insured event in Australian history, and the second costliest in the world that year. This means that not only those living in flood prone regions will be facing rising premiums, but all households, as insurance companies attempt to recoup losses across their client base.
Rising premiums, for those able to get insurance, will lead to more families going without and facing dire circumstances in the increasingly likely case something happens. There doesn’t have to be a major flood or bushfire for someone’s home to be severely damaged or declared unliveable. A falling tree branch or flash flood can cause enough damage in many instances.
The rise in insurance costs can be attributable to several factors. As noted, natural disasters have been prevalent in recent years, heightening the number of claims insurers incur. The increases in floods, cyclones and bushfires have thus increased risk exposure, leading to higher premiums from reinsurers. The increase in what insurers pay for reinsurance then flows on to consumers.
According to the Insurance Council of Australia, reinsurance premiums for Australia have increased between 20 and 30% in recent years. In addition, the rising values for homes and cars are making replacement costs higher, not to mention the cost increases in parts and labour needed to make repairs. As a result, claims have not only become more frequent, but costlier as well.
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According to an Actuaries Institute report from 2023, 12% of Australian households were facing home insurance affordability stress, following a 28 per cent increase in home insurance premiums. They estimated that 1.24 million Australian households are facing home insurance affordability stressed and spending average 8.8 weeks of their income on home insurance. Given the continued rise in premiums, these numbers have likely increased.
What is even more distressing for South Australians, is the rate at which insurance costs have risen in the State. While the rate of CPI increases for Adelaide versus Australia (not including insurance and finance) have been almost identical, Adelaide’s insurance costs have risen by almost 10pp more than the rate in the rest of Australia.
There is no specific data on why South Australia has been experiencing such a significant rise. However, part of the explanation may be due to the relatively low base at which rates have been in the State.
As the need for insurance companies to spread risk over an increasingly large base of subscribers grows, it makes sense that South Australia would see some of the largest percentage increases. However, despite this increase, South Australia continues to have some of the least expensive rates of insurance, both for cars and home and content.
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While insurance companies are facing more claims and higher costs, higher premium income and a resurgence in investment income have meant that revenue is growing, with a 5.0% jump this year.
Industry profitability has also quickly rebounded as insurers passed on their claim and reinsurance expenses in the form of rapid premium price rises for policyholders. According to Industry Analysis IBIS, insurers have generated strong profit margin buffers to withstand future claims and reinsurance expense exposure. Between 2019 and 2023, profits for the sector went up more than 26%.
However, it’s not just the cost of insurance that is the problem – it’s the ability to get coverage at all.
Flood risk, in particular riverine flood, plays a significant role in the current pressure on home insurance affordability and the ability to obtain a policy. In addition, more than 5.6 million Australian homes are at risk of a bushfire.
Australia’s population continues to grow in places with greater exposure to storms, floods, bushfires and cyclones. By 2050, the costs of rebuilding and repairing homes, replacing contents, and displaced people are expected to exceed $8.7 billion per year. According to the Insurance Council of Australia, this is a conservative estimate and more than double the current costs.
While it is tempting to focus policy on constraining or reducing costs, the solution can’t just target the insurance side of things; it must also deal with the underlying risk. Looking ahead, what’s needed is improved land use planning and building standards including a national mandate for considering disaster and climate risk in development plans and imposing relevant technical requirements for building resilience.
Making requirements national should help with doing a better job of pooling risk. Enforcing strict building codes for fire and flood zones and improving performance standards across the board are critical. The risks of catastrophic weather events are only going to increase.
It is important that in an overall strategy of climate risk mitigation, insurance be a key part. Otherwise, a growing number of Australians, and South Australians in particular, will find themselves priced out of the market with no recourse in the event of disaster.
Dr Susan Stone is Credit Union SA Chair of Economics, UniSA
