What to do about surging insurance costs?

Insurance executives argue that the key to dealing with rapid premium price increases is risk mitigation – changing how and where we build homes to limit the costs of natural disasters, especially floods.

For example, Suncorp reversed a decision in 2013 to stop covering the Queensland town of Roma when the government built a levee to protect the town, promising sharply lower premiums once it was built.

But others maintain that stronger forms of government intervention in insurance markets are needed.

Actuary John Trowbridge, a consultant and former APRA member, says mitigation measures, such as flood levees, are a medium to long-term response but are unlikely to reduce premiums in the short term. Instead, he believes some sort of insurance pool arrangement is needed to put downward pressure on costs

“The underlying question is who is going to pay? Someone has to pay if there are properties that need to be insured and the policyholder cannot afford to pay a premium,” says Trowbridge.

“Either the taxpayers pay, or the rest of the insured population pays. Until something of that nature can be established, there is nowhere to go.”

Insurance pooled funds work overseas. In the UK, for example, insurers pay an annual levy to a flood reinsurance pool and charge their customers around £10 each on average. The pool was designed to reduce the cost of flood cover. However, Trowbridge says it took years to get that system up and running, and any such arrangements here would require support from both state and federal governments.

“It becomes a huge political, economic and social question – the cost of these floods has been so high,” says Trowbridge.

Some argue the federal government’s $10 billion cyclone reinsurance pool – available only for cyclone-prone areas in northern Australia – could be a template for flood cover action. For example, the Australian Consumer Insurance Lobby has argued that such a scheme could lower insurance costs across the country.

However, there is debate over how much the scheme will save consumers. While the Morrison government promised premium “discounts” of up to 46 per cent for North Australians facing the sharpest insurance cost increases, Labor Financial Services Minister Stephen Jones has since said premiums will not be reduced by anything like that .

Actuary Sharanjit Paddam, of Finity Consulting, argues that swimming pools will not make insurance costs affordable in high-risk areas. “It can change a $20,000 premium to a $15,000 premium. It’s still unaffordable,” he says.

‘Urgent’ need for tax reform

A more effective way to bring premiums down, says Paddam, would be to change the way insurance is taxed. Insurance executives certainly agree, with the Insurance Council of Australia taking aim at the NSW government’s charge of an emergency services levy on insurance policies.

Fiona Thompson, Suncorp’s group manager for people, culture and advocacy, told a market briefing in November that Australia’s tax on insurance was in urgent need of reform. “In a time of increased risk and a changing climate, we should not be adding 20 to 40 percent to a home insurance premium in taxes and charges,” she said.

“And because of the way the tax is applied, the higher a person’s risk, the higher the premium, and the more tax they pay. And we know there is a direct correlation between a higher risk and a lower socioeconomic status. So, when we’re talking about addressing insurance affordability and climate change, the tax system has to make it possible not to impede insurance coverage.”

‘Extreme Solutions’

The industry’s other big demand is for greater focus on resilience – more investment in community infrastructure such as flood levees, upgrades to building standards, or in extreme circumstances the relocation of entire communities to higher ground. However, some experts argue that there are limits to what can be achieved through flood mitigation.

Insurance lawyer John Berrill, who worked with former APRA official Trowbridge on a 2011 federal government review of catastrophe insurance, says mitigation can help but is no silver bullet.

“There’s no doubt that governments should look at intervening in the market through reinsurance pools and those kinds of arrangements,” said Berrill, head of law firm Berrill & Watson. He says there are many precedents for intervention: for example, the federal government administers a terrorism insurance scheme, while workers’ compensation has heavy government involvement.

“The government has a lot of skin in the game here, because to the extent that people don’t take out insurance, they fall back on the government,” says Berrill.

Similarly, Julia Davis, of the Financial Rights Legal Center, also points to the many ways in which governments already intervene in insurance markets. She advocates a solution she says is “fairly socialist” – for the government to pay subsidies for vulnerable people in high-risk areas. It would have to be carefully designed, she says, so that it didn’t apply to newly built homes, and so the subsidies didn’t support insurance company profits.

“Looking at the next 20 to 30 years of insurance in a changing climate, we’re going to have to consider some extreme solutions,” she says.

Regulators, meanwhile, admit there is a problem.

APRA member Helen Rowell told an insurance event in November that the regulator was in discussions with the Australian Securities and Investments Commission, Treasury, the Insurance Council of Australia and other stakeholders. Their goal is to better understand the problem and what can be done about it.

It’s fair to say they’ll have their work cut out for them.