Bill shock: Soaring insurance costs spark affordability woes

People opening their insurance bills lately may have received a shock, as premiums on home and car insurance have been soaring, further squeezing already tightened household budgets.

It’s an issue which has put affordability in the spotlight while insurers grapple with their own rising costs including the toll of increasingly frequent and severe natural disasters.

While there have been disasters over the summer, the country has not faced the massive insurance costs it experienced from the east coast floods of early 2022.
While there have been disasters over the summer, the country has not faced the massive insurance costs it experienced from the east coast floods of early 2022.Credit: Getty Images

While analysts and investors broadly think premium growth will ease in 2024, there’s a growing risk of consumers dropping cover, and government stepping in, if prices continue spiralling upwards at their recent pace.

So, what’s likely to happen to premiums in the year ahead, and what’s on the cards if the rapid rise in insurance costs doesn’t slow down?

Over the past year, rising insurance premiums have been among the fastest rising costs for households, growing in the double-digits, even as the Reserve Bank has looked to kneecap inflation.

According to the latest inflation figures from the Australian Bureau of Statistics (ABS), insurance prices rose 16.3 per cent in the year to November: the highest annual price movement since the beginning of the monthly consumer price index indicator two years ago.

Insurance companies have reported even higher price rises of 20 per cent for home cover, after a horror run of natural disasters – especially floods – in previous years. This month, Australian Securities and Investments Commission (ASIC) chair Joe Longo told The Australian Financial Review the country faced an “emerging crisis” over insurance and whether people would be able to afford it, especially in areas facing growing risk of natural disasters.

It also comes amid a parliamentary inquiry into the sector and worsening insurance affordability.

Some of the main drivers of higher premiums have been rising natural disaster costs as insurers pay out claims to customers, higher costs for repairs and parts, and higher reinsurance costs.

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Reinsurance – where local insurance companies offload some of their risk onto global players – is a form of insurance for insurance companies, and has become increasingly expensive for insurers, especially as the frequency and magnitude of natural disasters has stepped up.

Slower premium increases expected

In August, QBE boss Andrew Horton said reinsurers were increasingly judging Australia as a riskier part of the world as it recovered from a run of disasters including the east coast floods of early 2022 which was the most expensive insurance event in the nation’s history.

However, reinsurance price pressures may now be easing, providing some hope of easing pressures on premiums.

This month, IAG chief financial officer William McDonnell said global reinsurance markets had stabilised during 2023, allowing the insurer to purchase greater reinsurance protection than it had originally expected.

Perpetual senior equities analyst Brett Le Mesurier said the reinsurance market seemed to stabilising as the amount of capital committed to it improved, and Australia accounted for less claims.

“The reinsurance market has a better outlook for capital now than it did 12 months ago,” he said. “And the Australian claims experience, from the perspective of the reinsurers, is also improving.”

However, the extent of insurance premium increases would depend on insurers’ costs including the volume of claims received by insurers, Le Mesurier said.

“Home premiums should slow because there’s been less catastrophe claims,” he said. “Car insurance premiums will depend on the price of parts and labour.”

While there have been disasters over the summer, the country has not faced the massive insurance costs experienced almost two years ago: the east coast floods of early 2022 were the most expensive insurance event in the nation’s history.

Severe storms which occurred around Christmas Day, as well as ex-Tropical Cyclone Jasper, led to an influx of claims over December with the country’s biggest insurer IAG confirming it had received about 17,000 claims from events that impacted Australia in December.

More broadly, the insurance industry received more than 60,000 for Christmas and New Year’s storms across Queensland, NSW and Victoria as of January 12, according to the Insurance Council of Australia.

Morgan Stanley equity analyst Andrei Stadnik, said reinsurance price pressures may now be easing, but he also expected insurance premium pricing to slow in 2024 given growing affordability pressures.

“Customers will not accept 15 to 25 per cent price rises on insurance (several times above wage growth) for much longer,” he said, noting many customers would likely be shopping around.

According to Morgan Stanley’s business pricing survey, motor vehicle insurance pricing increased by 37 per cent over the year, while home insurance stepped up by about 22 per cent.

Stadnik said motor insurance premiums were driven by car prices which are still significantly higher compared to pre-COVID, leading to higher replacement values and sums insured, as well as increased motor claims inflation.

He warned significant price increases could invite government intervention, with a rising possibility of regulation such as price controls. “While not imminent, we think they could emerge in 2024 or ahead of the next federal election to be held before or during 2025,” he said.

While insurance premiums have been rising, Le Mesurier said insurers were absorbing more of the risk themselves and that price controls would simply reduce the availability of insurance.

“Insurers are particularly conscious of affordability,” he said. “Insurers have not been making outrageous margins, in fact, they’ve been under pressure for a long time. If insurers don’t get a return, that capital won’t be there.”

Insurance Council of Australia chief executive Andrew Hall said insurance premiums could ease if inflation stabilised, the number of extreme weather events fell and insurers returned to profitability.

“When insurers are having better years, profitability wise, that’s when we see premiums come down,” he said. “I’m hopeful that factors like higher interest rates, and depending on how the rest of this summer plays out, the increases we’ve seen in the last 12 to 18 months will moderate.”

Higher interest rates bolster insurers’ profits because their premium pools tend to be invested in highly liquid short-term investments like term deposits, which deliver higher returns when interest rates are higher.

Hall said in the short term, the government could reform or abolish state-based taxes such as stamp duty which would immediately provide a roughly 10 per cent relief on the cost of premiums, as well as removing the emergency services levy in NSW, which the state government has promised to do.

“Governments are getting windfall taxes out of insurance premiums at the moment,” he said.

However, Hall said the main driver of having affordable premiums in Australia would be to reduce medium to long-term risk.

The industry has for years been warning of the long-term risk caused by more extreme weather as a result of climate change, pushing for greater government investment in resilience, such as flood levees, changing building standards, or even relocating entire communities in the most extreme cases.

As part of a parliamentary inquiry into the sector, insurance giants in December warned that premiums costs would spiral beyond the reach of more households unless some homes were relocated from high-risk areas and planning laws were improved to better consider natural disasters.

“We have got growing populations in areas that are very vulnerable to climate risk, and that’s already playing out,” Hall said. “I think we’ve got to have a complete mindset shift around where and how we build houses and go back and fix up past mistakes.”

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